It’s been more than two weeks since Canopy Growth (NYSE:CGC) reported better-than-expected Q2 2020 earnings. CGC stock jumped as much as 25% on the news before closing up 13.4% in February 14 trading. Since then, Canopy’s stock has fallen below where it was trading before announcing earnings.
The coronavirus-led correction hasn’t helped. Nor has the buzz from one analyst that the company has grown 115,000 kilograms more cannabis than it has sold since the beginning of 2018, suggesting Canopy has one heck of an inventory problem.
“On an annual basis, the entire Canadian legal market is ~180,000kgs (run rate), suggesting Canopy carries >50% of industry wide needs for the year (some may be CBD inventory in U.S.),” Kirk wrote in a note to clients. “Assuming Canopy ceased all growing operations AND maintained current market share, it would take ~2.5 years to sell this product in Canada.”
I’ll leave it up to the cannabis experts to figure out whether the inventory problem MKM Partners analyst Bill Kirk describes is real or imagined. The company was quick to point out in its earnings report that it’s gained 22% of Canada’s recreational cannabis market.
Probably the best stat from Q2 2020 was the 14% reduction in its operating expenses during the quarter, something CEO David Klein was committed to fixing for Canopy’s controlling shareholder and Klein’s former employer.
Constellation Brands’ (NYSE:STZ,NYSE:STZ.B) loss was Canopy Growth’s gain. Despite this high praise, I still believe investors interested in owning Canopy Growth stock, ought to consider STZ instead.
Here’s why.
There Are Some Really Uninformed People Out There
When I first saw the USA Today story that 38% of Americans surveyed about Corona beer said they wouldn’t buy the product because of the coronavirus, I suddenly thought my calendar had jumped a month and it was April Fools.
However, when Barron’s ran an article putting the kibosh on such nonsense, it became evident that some people need to stay in school longer or get some common sense. So far, the erroneous assumption that the coronavirus is spread through beer has yet to affect Constellation Brand’s stock price.
That will surely change if people keep dying in the U.S. despite the protestations of the company to the contrary.
“It’s extremely unfortunate that recent misinformation about the impact of this virus on our business has been circulating in traditional and social media without further investigation or validation,” said Constellation Brands CEO Bill Newlands in a February 28 press release. “Unlike many of our competitors, sales of our beer brands are focused almost entirely on the U.S. market. Our company doesn’t have much exposure to international markets such as China that have been most impacted by this situation.”
Newlands is making two points: First, the idea that the coronavirus is spread by drinking Corona beer is pure poppycock. Second, Constellation Brands isn’t getting hurt nearly as much as its peers operating in China. With a majority of its sales in the U.S., it’s been insulated to a certain extent from reluctant consumers.
Why STZ Over CGC Stock?
First, let me say that I don’t have a problem with investors owning CGC stock. I said as much in my February article about the company. In it, I voiced my support for Canopy Growth’s delay in launching its line of cannabis-infused drinks. I suggested that the delay likely had as much to do with retailers being unprepared for Cannabis 2.0 as it did the company somehow dropping the ball on production.
My InvestorPlace colleague, Laura Hoy, sees things similarly, asking if investors have “forgotten that Canopy is still worlds away from becoming profitable?” I guess we’ll find out how this all plays out. However, I’d rather be in Canopy’s position with 22% adult-use market share and a delay than some of its competitors who need edibles, vapes, and drinks to provide a lifeline to their existence.
That said, cannabis stocks remain incredibly volatile. Canopy’s stock is no different. In the first nine weeks of 2020, CGC has risen by 10% weekly on two occasions; it’s also fallen by 10% or more on two occasions. By comparison, STZ stock has neither risen nor fallen by 10% or more in any given week, year to date.
This, despite 38% of Americans being incredibly dumb, naive, or both.
The reality is that Constellation Brands reported Q3 2020 earnings in early January that beat analyst estimates. Further, it raised its guidance for the entire fiscal year to at least $9.45 a share, 45 cents higher than its previous guidance. Meanwhile, the consensus is for $8.51 a share.
Former Canopy CEO and co-founder Bruce Linton believes Klein is the right person to take the company to the next level. I couldn’t agree more.
In October, I reminded investors that Constellation’s close involvement with Canopy was a good thing. Klein taking the reins is an excellent move. Down almost 9% year to date (including dividends) through March 2, now is an excellent time to buy STZ stock and benefit from Canopy’s continuing maturation process.
If you are risk-averse, Constellation Brands is the smarter play over CGC stock.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
