Constellation’s Backing Will Keep CGC Stock Propped up in the Long Term

Constellation Brands is behind CGC stock for the long haul

Canopy Growth (NYSE:CGC) is Aurora Cannabis (NYSE:ACB) with a sugar daddy, Constellation Brands (NYSE:STZ), a beer, wine and spirits producer that sank $4 billion into it last November and since really has bolstered Canopy Growth stock.

Constellation's Backing Will Keep CGC Stock Propped up in the Long Term
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Constellation provides a financial backstop Canopy needs, and Aurora lacks, as it waits for the marijuana market to take off. Both Canopy and Aurora have invested heavily ahead of the market, but results have been disappointing. Both stocks are down 17% so far in 2019.

Constellation bet last year that marijuana legalization would sweep the U.S., but that has yet to happen. If and when it does shares in both Aurora and Canopy should zoom, but they’re both ahead of their financial skis and need patient money to stay in the game.

Canopy has patient money.

Constellation Brands and CGC Stock

To get back some of its investment, Constellation has been trying to sell its low-end wines. But the Federal Trade Commission has been slow-walking approval of the $1.7 billion deal with E&J Gallo, announced in April.

Canopy’s disappointing quarter, and the prospect of as many as $500 million in losses through early 2021, has hammered both Canopy and Constellation shares. Canopy has been hit by the slow pace of Canada’s pot legalization. Federal legislation passed last year but the provinces must each set up their own regulatory regimes. Delays there mean slow sales.

Meanwhile, Constellation has taken control of its investment, ousting Canopy CEO Bruce Linton and promising to have its own man at the top by the end of 2019.

Time, Patience and CGC Stock

Constellation has accepted Canopy’s losses and is still buying assets on its behalf. That’s an important signal to shareholders of its intent.

Just this month Canopy bought 72% of BioSteel, which makes packaged drink mixes sold to athletes.

Canopy hopes to get CBD oil, a cannabis derivative, into BioSteel’s products. Even if it doesn’t BioSteel offers some needed diversification as it waits for both Canada and the U.S. to get on the legal pot train. Illinois became the 11th state to legalize recreational pot use earlier this year and is now starting to license dispensaries.

The big news would be a change in the federal attitude toward marijuana, which at this writing is still listed as a Class One drug alongside heroin . Until that happens the business can’t really take off. Companies like Canopy must remain north of the border, like rum runners in the 1920s.

Once prohibition does end, however, all bets are off.

The Bottom Line on CGC Stock

If you believe marijuana has a big future in the U.S., Canopy Growth is a more conservative way to play that than Aurora. Constellation provides a patient financial backstop. It can wait until 2021 and a new political environment that might be more friendly toward pot.

But there are risks. Constellation could try to take out your stake while prices are still low, before the legal turnaround happens, to maximize its own profits. Constellation has already taken the wheel of Canopy. But even that minimizes your downside risk.

Can you trust a liquor salesman to lead you to marijuana profits? That’s the choice you must make here. As a conservative investor I’d prefer to buy shares in Constellation itself, but younger, more aggressive investors might like to speculate here.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/constellations-backing-will-keep-cgc-stock-propped-up-in-the-long-term/.

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