As the launch of the recreational marijuana market in Canada approaches, investors are trying to figure out which cannabis stocks will eventually dominate the sector.
The stakes are high in a rapidly evolving industry where companies are positioning themselves to profit from a wide variety of opportunities beyond the sale of cannabis for smokers. Among those, cannabis-infused beverages are getting significant attention, and two of Canada’s marijuana companies are early favourites to lead the sector.
Canopy Growth became the early favourite to dominate the cannabis drinks market when Corona owner Constellation Brands took a 9.9% stake in the company last year for about $245 million. In August, Constellation Brands decided to go all-in and announced a stunning $5 billion additional investment in Canopy Growth to boost its ownership position to 38%.
The companies are working together to develop non-alcoholic drinks that would be infused with cannabis. It is easy to see why Constellation Brands is making such a big bet, especially if the U.S.-based company is correct in its assumptions that the United States will eventually follow Canada’s legalization lead.
The cash infusion by Constellation Brands definitely gives Canopy Growth the upper hand in the beverages race.
HEXO is relatively small compared to Canopy Growth. At the time of writing, the company has a market capitalization of $1.5 billion compared to $14 billion for the market leader. That already puts it at a disadvantage, but HEXO has a potential ace in its back pocket.
In early August, HEXO and Molson Coors Canada announced plans to start a new joint venture business to target the non-alcoholic cannabis-infused beverage market in Canada once legalization takes effect.
The company will have its own independent board of directors and management team and be 57.5% owned by Molson Coors Canada. HEXO will hold the remaining stake. The consumable cannabis segment is expected to be legalized in 2019, so there isn’t much time to get products ready for the anticipated demand.
The partnership makes more sense when you dig a bit deeper into the history of the two companies. Molson is one of the oldest corporations in Quebec, and HEXO is the leading marijuana player in the province and is the first cannabis producer in Quebec to get a licence from Health Canada. HEXO is also one of the more innovative companies in the sector, targeting smoke-free cannabis opportunities, including edibles, cosmetics, and wellness products.
Is one a better beverage bet?
Canopy Growth has a head start through its early tie-up with Constellation Brands, so it would probably be the initial favourite. However, Molson Coors is one of the top two players in the Canadian beer business, and that should be a strong advantage once the new business gets up to speed.
In the end, I suspect Constellation Brands will take over Canopy Growth, and it wouldn’t be a surprise to see HEXO get rolled into Molson Coors Canada, so both should be top picks for investors who want to play the cannabis-infused beverage market.
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Fool contributor Andrew Walker has no position in any stock mentioned. The Motley Fool owns shares of Molson Coors Brewing.