Cut Your Canopy Growth Corp Bet by Half and Win Big

If you’re expecting an article on why Canopy Growth (NYSE:CGC) is undervalued or overvalued, you’ve come to the wrong place because, in my opinion, it’s way too early to put an intrinsic value on CGC stock.

Think about it.

CGC stock is currently valued around 93 times sales. Constellation Brands (NYSE:STZ), which owns 9.9% of its stock, trades at slightly less than six times sales.

Is Canopy Growth, Canada’s biggest publicly traded marijuana stock at $5.8 billion, worth 15 times STZ stock?

I don’t think so.

It is what is at this moment in time. Given it’s next to impossible to come up with any stock’s true intrinsic value, it makes sense to put valuation questions aside for the entire marijuana industry because no one knows what’s real and what isn’t.

For me, the current marijuana environment is very similar to the tech sector in 1999. Valuations weren’t worth the paper they were written on. It’s not because some of the companies back then didn’t deserve huge multiples; it’s just that when you have a basket of tech stocks trading for 16 times revenue, it’s hard not to get a nosebleed just thinking about it.

CGC Stock Speculation

Let’s assume that Canopy Growth’s true intrinsic value is somewhere between its price-to-sales ratio of 93 and Constellation’s at five times sales.

That’s a pretty big spread making the actual multiple difficult to pin down. However, if I had to bet which of Canopy Growth and Constellation had the more accurate P/S ratio, the latter would be the logical choice.

Furthermore, if I was going to bet on Canopy Growth, still a speculative play despite its position within the marijuana industry, I’d first consider how much I was prepared to lose, and then I’d do the following.

Hedge Your Bet

My InvestorPlace colleague Josh Enomoto believes that the price-to-sales ratio of companies like Canopy Growth is irrelevant given the newness of the entire industry.

I argue that the P/S ratio is somewhat irrelevant with marijuana companies. Recreational marijuana just became legal in Canada. We don’t have a precedent for this absolute paradigm-shift,” Josh wrote Jun. 25. “Yesterday, you could have been thrown in jail for smoking a joint. Today, you can light up freely.”

He’s absolutely right.

There is nothing to compare it to. The fact that almost half of Canadians would buy marijuana-infused food products if legally available suggests the bigger slice of the marijuana industry will have less to do with the leaf itself and more to do about edibles and drinkables.

And we have even fewer data available to tell us who the leaders will be in this area of the marijuana marketplace. 

Take the Liquor Control Board of Ontario, for example. It is the leading seller of alcoholic beverages in the province of Ontario where Canopy Growth is based. Government-owned and operated, it increases revenues without fail between 5%-6% annually.

It will also operate the province’s retail cannabis outlets under the Ontario Cannabis Store brand once legalization officially kicks off Oct. 17.

You can be sure the LCBO’s projections for the first year of operations are all over the map because nobody knows how it’s all going to shake out.

Lagunitas is a California brewery owned by Heineken (OTCMKTS:HEINY). It recently launched Hi-Fi Hops, a cannabis-infused sparkling water product, one with 5mg of both THC (what gets you high) and CBD in a 12-ounce can, and another with 10mg of THC and no CBD. 

Canopy Growth and Constellation have played it very close to the vest about their plans to develop cannabis-infused drinks, but you can be sure the Heineken-sponsored product hitting the shelves in California has Bruce Linton and Rob Sands — CEOs of Canopy Growth and Constellation Brands — moving up their schedule on this front.

The Bottom Line on CGC stock

Constellation Brands delivered Q1 2018 earnings Jun. 29.

While sales were higher, its operating margin was 230 basis points lower to 37.8% on higher marketing and transportation costs in the quarter. As a result, its adjusted net income dropped 5% in the quarter to $2.20 a share from $2.32 a year earlier.

Included in Q1 2018 results was a $258.3 million unrealized gain from its investment in Canopy Growth. To date, Constellation Brands has almost $1 billion in unrealized gains from its nine-month-old investment.

If you feel strongly about the marijuana industry’s future growth, the smart move would be to take the amount you are prepared to lose on Canopy Growth and cut it half, putting 50% into CGC stock and the other 50% into Constellation Brands.

Long term, I think you’ll be pleased with your decision to hedge your bet.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC