There’s no doubt that Canopy Growth (NYSE:CGC), stock is one of the best bets among Canadian cannabis companies, thanks in large part to the substantial financial support that the company is getting from Constellation Brands (NYSE:STZ).
In July, I suggested that interested investors hedge their bets on Canopy Growth stock by buying equivalent amounts of CGC stock and Constellation stock.
The Bigger Picture
“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 (in) half, putting 50% into CGC stock and the other 50% into Constellation Brands,” I wrote on Jul. 5.
“Long-term, I think you’ll be pleased with your decision to hedge your bet.”
A $10,000 bet on CGC stock made on Jul. 5 earned $221 through December 14. A 50/50 split between CGC stock and Constellation lost $688 due to a 16% decline in STZ stock over the last five months; analysts have become wary of Constellation’s $4 billion investment in Canopy.
“Branding will be key to unlocking value in cannabis business, but the winners are far from clear,” said Macquarie analyst Caroline Levy in November. “It thus seems difficult to see any near-term profits for Canopy and possibly sub-par returns for many years, if it continues to prioritize sales growth and market share.”
That is precisely why I recommended that investors hedge their bet in the first place. If Canopy Growth stock doesn’t fly, Constellation will take a hit in the short-term, but over the long-term, STZ will be fine.
If you put all your eggs in one basket, you could end up with a big goose egg.
An Option for Risk-Tolerant Investors
Unless you follow Canopy Growth stock closely, you’ve likely never heard of Canopy Rivers (OTCMKTS:CNPOF), a Toronto-based venture capital investment firm. Canopy Rivers makes investments in best-in-class private and publicly-traded companies across the cannabis value chain, from producers to marketers and everything in between.
CGC owns approximately 25% of Canopy Rivers’ stock. Bruce Linton, the co-founder and CEO of Canopy Growth, is acting CEO of Canopy Rivers.
Canopy Growth’s consulting firm, XIB Consulting Inc, provides deal flow to Canopy Rivers. The two principals of XIB, Sean McNulty and Peter Hatziioannou, own shares in Canopy Rivers
“We decided to create a separate vehicle where we would could take minority interests, create alternative transaction structures and provide both growth capital and strategic support,” McNulty said about Canopy Rivers in November.“The deal flow is sometimes overwhelming. We’ve evaluated hundreds and hundreds of opportunities, but we’re very picky because we’re trying to get it right for every investment.”
So far, XIB has found 11 investment opportunities for Canopy Rivers. If the U.S. federal government legalizes pot, which most expect will happen sooner rather than later, McNulty and Hatziioannou will have to hire more professionals to carry out due diligence.
That would be a great problem to have.
The Bottom Line on CGC Stock
I believe the CGC-Constellation tie-up is a good one for both companies’ shareholders.
As for Canopy Rivers, if you’re more risk-tolerant, the shares provide a compelling investment opportunity after losing 57% of their value since their public debut on Sept. 20.
However, I wouldn’t use a retirement investment vehicle to buy CGC stock because you won’t be able to deduct any capital losses from your taxes.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.