Let’s turn back the clock to a heady time in the pot biz. Back in the fall of 2017, beverage giant Constellation Brands (NYSE:STZ) bought a 9.9% stake in cannabis company Canopy Growth (NYSE:CGC). Then Constellation upped the ante on its CGC stock position in August 2018 with a headline-grabbing $4 billion investment.
That was perhaps the biggest development in the global cannabis industry at that time. Onlookers debated the merits of taking such a massive position in a burgeoning and quasi-illegal market.
Since then, the critics may feel vindicated as the CGC stock price has declined from the $40’s in August 2018 to around $15 in early May of this year. That’s a tough pill for stakeholders, including Constellation Brands, to swallow.
Much like Warren Buffett recently did with his airline shares, Constellation Brands could easily have abandoned its CGC stock position. Yet, sometimes companies don’t follow the path of least resistance. Thus, Constellation’s latest move might surprise you and even motivate you to reconsider your outlook on Canopy.
Staying in the Cannabis Game
Even with the CGC stock-price debacle, Constellation Brands is evidently willing to stay engaged in the cannabis market. By recently exercising some of its warrants, Constellation increased its stake in Canopy by approximately 245 million CAD. That equates to $174 million in American currency as well as a 38.6% stake in Canopy.
Constellation still retains a considerable number of unexercised warrants. If they were all exercised, Constellation’s total interest in Canopy could increase to more than 55%.
Still, even though Constellation didn’t exercise all of its warrants, it’s still taking a huge position in Canopy. And while Constellation isn’t “doubling down” in a literal sense, it’s showing a whole lot of confidence in Canopy and in the cannabis industry generally.
That being said, you shouldn’t buy or hold CGC stock just because Constellation Brands bought it. Prior to making a decision, it’s important to know why Constellation increased its position in Canopy. Then you can choose to buy some Canopy shares, or not.
The Opportunity’s Still There
Losing money on a stock position doesn’t always mean that you have to change your long-term thesis. Given enough time and patience, a seemingly bad investment can turn out to be a real moneymaker.
That, in a nutshell, appears to be Constellation President and CEO Bill Newlands’ approach to his company’s investment in CGC stock. He says, “While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial.”
That’s a well-worded summary of what the cannabis-industry bulls have been saying for several years. But Constellation isn’t just investing in the overall cannabis market. It’s investing in a specific company.
And with David Klein having taken the CEO position at Canopy in January, Newlands seems confident in the company’s leadership. “Canopy is best positioned to win in the emerging cannabis space and we’re confident in the strategic direction of the company under … David Klein and his team,” says Newlands.
While he’s not necessarily saying it directly, it can be assumed that Newlands believes Klein will enforce fiscal discipline at Canopy. In 2020 so far, Canopy has let go of nearly 1,000 workers.
That’s a harsh reality, but it’s probably a necessary step for Canopy to take this year. The spread of the novel coronavirus has forced many companies to engage in belt tightening. In addition to the job cuts, Canopy stopped growing cannabis in Colombia and ceased some of its operations in Africa.
Moreover, Canopy closed one of its facilities in Canada and suspended its hemp-related operations in upstate New York. If you believe that Klein and Canopy are moving in the right direction with these cost-cutting measures, then you might very well agree with Newlands’s bullish outlook on the company.
The Takeaway on CGC Stock
Was Constellation Brands right to increase its interest in CGC stock? Only time will tell. Still, Constellation seems to have a clearly defined reason for believing in Canopy’s future. Perhaps you do, as well.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
