We are in the early stages of legalized marijuana in this country, where the hyperbole is so thick you can cut it with an ax.
If someone tells you at a cocktail party that this stock or that stock is the best way to play the marijuana game, have the good sense to get so sloshed you forget the name of the company by the time you arrive safely at home in a cab.
“[At Canopy], we probably have made more mistakes or attempts that resulted in error than any other company in the sector,” Linton told the Globe and Mail in a March 2017 interview. “There isn’t a book to follow.”
Perhaps it’s that view that pushed Linton to tie his company’s wagon to Constellation Brands, Inc. (NYSE:STZ) in October 2017, selling 9.9% of WEED to the U.S. drinks giant for a paltry $245 million. I say paltry because it’s now sitting on $700 million in pre-tax unrealized gains on its investment, including $258 million from the first quarter alone.
So, while WEED’s stock gained 378% over the past 12 months, Constellation has managed to eke out a 13% gain over the past year, barely ahead of the S&P 500. In hindsight, I’m sure CEO Rob Sands wished he had bought more.
Of course, to do so would require that Constellation take the appropriate percentage of Canopy losses and report them on its income statement, cutting profits by as much as US$5.2 million merely by owning an additional 0.1% of Canopy’s stock.
The partnership is what matters
Both parties to this arrangement benefit from each other’s experience.
Canopy Growth gets a massive leg up on the rest of the cannabis field — there have been all kinds of speculation about other drink giants getting into the game in a big way — by having a first-mover advantage when it comes to partnering up with the potential competition.
The devil you know is better than the devil you don’t.
As for Constellation, I recently suggested that the big wine, beer, and spirits producers know a thing or two about creating a controlled buzz for its customers. The partnership with Canopy producing cannabis-infused drinks for the Canadian market allows them to get a head start over many of the other drink businesses that want a piece of this new growth area.
Estimates suggest the recreational marijuana market could grow to $6.5 billion by 2020, easily eclipsing the spirits market, where Canadians spent an estimated $5.1 billion in 2016, pretty close to the $7 billion spent on wine, and not that much further away from the $9.2 billion spent on beer.
You see, if Constellation had its way, it would control the entire Canadian marketplace, marijuana and all.
The smartest play
Buying a single marijuana stock (Canopy) with some of your retirement money is one way to play this new and lucrative market. Another way is to have Constellation Brands draft behind the fantastic potential of Canopy, but you can’t pay your bills with wishful thinking.
The smartest play is to figure out how much you want to bet on the marijuana industry’s future (let’s say it’s $10,000) and do this:
1. Buy $5,000 in Constellation Brands stock;
2. Put $2,500 into Canopy Growth; and
3. Put the remainder ($2,500) into Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ).
Sure, you won’t make a killing should Canopy continue on its current trajectory, but you’ll do a heck of a lot better than you would if Linton and company flame out over the next two to three years.
But heck, it’s only money, right?
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Will Ashworth has no position in any stocks mentioned.