Canopy Growth (TSX: WEED)(NYSE:CGC) stock soared 31% in a single trading session following the announcement that alcohol firm Constellation Brands (NYSE: STZ) has returned to invest another $4 billion in the marijuana giant, bringing its total stake from 9.9% to 38%. The overwhelmingly positive news caused the broader basket of pot stocks to surge by double-digit percentage points with Aphria and Aurora Cannabis stock flying 20.5% and 19.5%, respectively.
Just last month, I’d predicted that Constellation would return for another Canopy stake, which would ultimately result in a complete buyout of the marijuana firm at some point down the road. I thought it was clear that Constellation was just dipping its toe into the marijuana waters with its first 9.9% stake, and that it would be back for larger puff come the next trough in the broader pot market.
Although many analysts have argued that pot stock valuations make “no sense whatsoever,” the big bet made by Constellation is nonetheless another colossal vote of confidence from a highly established firm that’s essentially turned a threat in legal cannabis into an opportunity to revamp sales and gain ground over its peers in the “sin” space. If Constellation is willing to pay up at these levels, retail investors should have no problem, as long as they’re willing to hold onto their position for at least five years.
I think it’s inevitable that the marijuana market will grow to become much larger than that of beer and wine industries. And now that Constellation has a front-row seat with a fatter piece of the pot pie, I think the floodgates are about to open, as institutional investors and other sin companies open their wallets wide to place bigger bets of their own in Canada’s major pot players like Aurora Cannabis, Aphria or Hydropothecary. Think of it as “keeping up with the Joneses.”
The Foolish bottom line
Although Wednesday’s rally was potentially exaggerated thanks to the sudden return of short-term traders, I believe another Santa Claus marijuana rally is in the cards for the latter part of this year and would encourage long-term investors to continue adding to their positions in a cautious manner, much like Constellation has done.
Over the past month, I’ve noted that traders have lost confidence in their short-term trades, leading me to believe that the weakness in the industry was an opportunistic entry point for long-term investors who’d wanted to participate in the marijuana “green rush” without suffering too large of a hangover.
Constellation’s larger investment in Canopy has brought the entire marijuana sector back into the limelight, however, so if you think you’ve missed out after the +31% pop, it was probably my fault for not pounding the table harder on pot stocks, as the as the public grew increasingly pessimistic and impatient.
Although it seems like you missed out, I believe the best has yet to come, so if you’ve got disposable cash on the sidelines, you may want to take a “slow and steady” tortoise approach (as Constellation did) to build your marijuana position before legalization day (or judgement day) finally comes to be.
I think there’s plenty of upside, but please go in with a long-term mindset; otherwise, you’re just going to end up throwing in the towel with a fat loss, causing you to break Warren Buffett’s number one rule: don’t lose money.
Stay hungry. Stay Foolish.
