Canadian cannabis producer Canopy Growth (NYSE:CGC) has benefited tremendously from last November’s $4 billion strategic investment by Constellation Brands (NYSE:STZ). However, that investment hasn’t stopped CGC stock from feeling the effects of a tumultuous cannabis market.
On Friday, CGC slid another 1.87%, bringing the decline of CGC stock since the end of April to 56%. On Thursday, Constellation’s shares were negatively impacted by Constellation’s investment in the cannabis producer. Constellation tumbled 6% after its investment in Canopy Growth took the shine off its Q2 earnings.
Constellation Brands’ Results
Constellation Brands reported its Q2 earnings last week. The company, which produces popular beer brands like Corona and Modelo for the U.S. market, as well as a number of wine and spirits brands, said its sales climbed 2% year-over-year in Q2. Its earnings per share of $2.72 beat analysts’ average expectations and its 2019 guidance also handily beat analysts’ average projections. Despite what should have been a solid quarter, its stock fell over 6% on Thursday.
The shares fell because the company reported a loss on its big investment in CGC.
Take Canopy out of the picture and Constellation’s EPS would have been $2.92 instead of $2.72.
Constellation Hasn’t Been Able to Turn Around Canopy Growth Stock
Constellation’s purchase of CGC stock gave it a nearly 56% stake in the Canadian cannabis producer. At the time the deal was first announced in August 2018, Canopy Growth stock was trading in the $30 range. When the shares peaked at over $51 in September in anticipation of the legalization of recreational marijuana in Canada, Constellation’s investment looked prescient. Then came the crash after Canadians failed to line up in huge numbers at cannabis shops. Production and distribution challenges have added to the misery of cannabis producers.
In July, Constellation Brands grew impatient with the way Canopy Growth was being run. CGC’s founder and co-CEO stepped down — he claimed he was fired – while Constellation selected Canopy Growth’s new CFO, along with several board members.
However, despite the leadership shakeup, Canopy Growth has failed to turn around.
Should Investors Avoid CGC Stock?
The initial wave of recreational marijuana legalization in Canada failed to live up to expectations. But the country’s cannabis market is picking up. In August, CGC reported that its dried cannabis sales to Canadian recreational users were up 94% compared to the previous quarter. And the second wave of legalization is set to begin at the end of this year, when marijuana edibles and cannabis-infused drinks will become legal in the country.
And that’s an area in which Canopy’s strategic partnership with Constellation Brands is expected to pay off, thanks to Constellation’s expertise in the bottling and distribution of beverages. There is also another big potential positive catalyst for CGC stock: More American states are poised to legalize cannabis products. The American market for CBD-infused products has been estimated to be worth as much as $22 billion by 2022. Food and lifestyle guru Martha Stewart has partnered with Canopy Growth to produce a line of CBD products that are expected to be launched by mid-2020.
The recreational marijuana market is a long game, making marijuana stocks like Canopy Growth worth considering. Investors looking to get rich quick, who bought shares at the height of the Canadian pre-legalization frenzy, got burned. But the long-term outlook of marijuana producers is good, and with CGC currently trading under $23, it can climb a great deal, given its upcoming positive catalysts.
Analysts may be split between buying and holding CGC stock, but they have an average 12-month price target of $37.45 on Canopy Growth stock, meaning they see a strong likelihood of recovery in 2020.
That would be good news for both Constellation Brands and Canopy Growth.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.