Here's why the best days of canopy growth are yet to come – The Fool Motley

Investors are invading cannabis stocks and many companies that no one had ever heard of just a year ago have now become well-known names in the marijuana industry. The legalization of marijuana for recreational purposes in Canada has drawn attention to stocks north of the 49th parallel, and Cover growth (NYSE: CGC) has become one of the early leaders of this nascent industry.

Many believe that the best days of Canopy Growth may well be behind. After all, the stock has already seen its stock multiply by 20 on the Toronto Stock Exchange since mid-2016, and its gains have been impressive in the few months it has traded on the New York Stock Exchange. But thanks in large part to an investment of nearly $ 4 billion from the Corona beer maker Constellation Brands (NYSE: STZ) In addition to its own strategic vision of marijuana dominance, the future of Canopy Growth is as promising as ever.

What Canopy Can Do Alone

Even before Constellation gained momentum by increasing its participation in the marijuana growers, Canopy had several goals that gave it a competitive edge over most players in the industry. Canopy already has a huge production capacity, having reported about 2.4 million square feet of licensed licensed crop space for cannabis by mid-2018. In addition, the company is investing heavily in increased production, with new greenhouses in key areas such as British Columbia, which could more than double its square footage to reach a target of 5.7 million square feet. Once fully online, Canopy's dried cannabis production capacity could reach a range of 450,000 to 500,000 kilograms, leaving it at the industry's leading edge or second to the most current investment in the sector. .

Moreover, unlike many cannabis producing companies, Canopy recognized the value of diversifying its geographical scope very early on. Rather than simply building distribution networks in Canada, Canopy already has a presence in several foreign markets and the ability to export cannabis allows it to avoid pricing problems in its domestic market in order to find the best profit opportunities in Canada. world.

Canopy also understood the importance of building a brand. The company's Tweed product line goes well beyond dried marijuana to encompass growth areas such as cannabis derived oil capsules. And even under Canada's plain packaging laws, Tweed is able to develop a loyal customer base that will allow Canopy to market value-added products with higher margins than raw dried cannabis.

Awning and Constellation

Yet the biggest vote of confidence in Canopy Growth comes from Constellation Brands. The alcohol specialist has made multiple investments in Canopy, starting with a close to 10% stake a year ago for $ 190 million and then doubling with his $ 3.8 billion deal in August latest. Under the terms of the agreement, Constellation has not only increased its ownership interest in Canopy to 38%, but has also given itself the opportunity to strengthen its interest in Canopy if it chooses to exercise its rights to the warrants and convertible debt to acquire additional shares of marijuana. producer.

The possibilities of collaboration between Canopy and Constellation have enormous potential. A number of companies are already exploring the potential of beverages containing various oils derived from cannabis, highlighting both the positive health effects of certain types of oils and the popularity of cannabis in general. Just as energy drinks have revitalized the downward market for traditional soft carbonated soft drinks, marijuana-containing beverages could also spark a renewed interest in the industry.

Constellation also sees collaboration as a defensive measure. Some cannabis advocates have highlighted the benefits of marijuana over alcohol. If consumers substitute cannabis for beer and spirits, it is therefore useful for Constellation to be exposed to both industries, while potentially leaving the Canopy stock available to investors seeking more pure exposure to the cannabis sector.

An innovation game

Finally, Canopy understands that it must foster innovation to stay one step ahead. This is largely the reason why the investment vehicle Canopy Rivers has been funded and already lucrative investments have been found that could bring a future to Canopy Growth.

Canopy Growth has already registered impressive gains for the top shareholders, and it is reasonable for investors to highlight both the risks and the potential benefits of investing in equities. Yet from a fundamental business perspective, the best days for Canopy Growth are clearly ahead of him.

Dan Caplinger has no position in the mentioned actions. The Motley Fool recommends Constellation Brands. Motley Fool has a disclosure policy.