October 30, 2017 was an important date for the cannabis industry in general, and the Canadian cannabis industry in particular. On that day; multinational beverage giant Constellation Brands Inc. (NYSE: STZ) (maker of Corona Beer) announced a CAD$245 million investment in cannabis industry leader, Canopy Growth Corp. (TSX: WEED).
That announcement is widely seen as kicking off the last feeding frenzy for cannabis stocks, with valuations taking off through November and December of last year. Now Constellation and Canopy have announced a further investment by Constellation – a deal that makes last year’s announcement pale in significance.
On August 15, 2018; Constellation Brands announced a CAD$5 billion investment (US$4 billion) in Canopy Growth. This expanded “strategic partnership” represents acquiring up to a 38% interest in WEED (if all warrants are exercised). Investors will have no problems doing the math here.
If Constellation’s initial investment in Canopy Growth was enough to ignite the whole cannabis sector, what is the potential impact of a deal twenty times as large? Then there is the context. Constellation’s original investment took place a year ahead of the official legalization of recreational cannabis in Canada – at a time when final legislative approval was not yet in place.
Today, we are weeks away from official legalization of adult-use “recreational” cannabis in Canada on October 17th. Rules and regulations for distribution have now been finalized by the Provinces (although Ontario has imposed a delay to bring in new rules – from a new provincial government).
So why hasn’t this news led to another immediate leap across the board for Canadian cannabis companies? Certainly the news has been a lift for WEED itself.
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A few of the large-cap Canadian companies have also seen a pop in share price in reaction to this news, but for most smaller cannabis companies, this huge announcement has barely caused a ripple.
One possible explanation for the somewhat muted response to what is clearly a much bigger announcement is regulatory uncertainty. The potential for cannabis-infused beverages is widely touted. The $1+ trillion global market for alcoholic beverages is ripe for taking market share – as cannabis beverages represent a more benign option for adult “recreational” beverages.
However, at this point, combining cannabis into alcoholic beverages isn’t even on the table. But even infusing cannabis into non-alcoholized beer beverages isn’t legal in Canada today, and there is no proposed legislative language currently on the table.
This move is widely anticipated – within the industry. Cannabis executives will point to 2019 as a possible window to introduce cannabis-infused beverages into the Canadian marketplace.
The situation in the U.S. is even murkier. Cannabis laws are still evolving on a state-by-state basis. While some states (that have authorized adult-use cannabis) already allow cannabis-infused beverages, without national legalization it becomes very restrictive (to say the least) for large companies to try to enter this market.
For cannabis investors, there are two ways to “play” this news. The safe course of action is wait-and-see. If this news triggers the next leg up for the cannabis sector as a whole, then there will likely still be plenty of upside to capture once a broader breakout is seen in the sector.
The more aggressive response to this news is for investors to deploy their “cannabis dollars” now. For investors who like to try to anticipate major moves in a sector (in order to capture the maximum profit potential), there are a number of drivers lining up that could (will?) provide plenty of push for the Canadian cannabis sector, in particular.
- Legalization of adult-use cannabis in Canada on October 17th
- Another major deal between an alcoholic beverage company and a Canadian cannabis company for infused beverages
- An announcement by Second Cup Ltd that it might convert some Ontario locations into cannabis retail stores
- Moderate valuations in the sector
On August 1, 2018; Quebec-based cannabis company, The Hydropothecary Corporation (TSX: HEXO, OTCQB: HYYDF, Forum) announced a new joint venture with Molson Coors Canada to produce non-alcohol cannabis-infused beverages. Molson Coors Canada is a business unit of Molson Coors Brewing Company (NYSE: TAP, TSX: TAP). That announcement specifically referenced 2019 as an anticipated launch point for cannabis-infused beverages in Canada.
Clearly, a trend is beginning to develop as Big Alcohol seeks strategic positioning in a new industry that could (easily) encroach upon its current markets – and revenues. If (when?) this trend accelerates, the flood of major corporate dollars into this sector will elevate the cannabis sector by itself.
In addition, while cannabis sector valuations don’t reflect this (yet), corporations are rapidly focusing on the retailing, branding, and marketing opportunities that will arise in Canada as a new multi-billion dollar industry (adult-use cannabis) is launched in Canada. A multitude of new strategic investments or joint ventures could spring up between cannabis companies and retailers who already have a large consumer footprint and established expertise in retailing, branding, and marketing.
Along with stoking investor sentiment among cannabis investors, this broadening of corporate participation as cannabis goes “mainstream” also equates to a broadening of the investor base for cannabis-related ventures. No matter how investors choose to interpret the Constellation Brands – Canopy Growth deal, the cannabis sector just got bigger.
This makes this CAD$5 billion deal “big news”, in every respect. Will this second Constellation/Canopy deal signal the next leg higher for the cannabis sector? Even if it doesn’t happen immediately, this is a cannabis industry driver that will be factored into the thinking of investors for many months to come.
Lastly, after the spectacular run for Canadian cannabis companies at the end of 2017, valuations have retreated significantly even as these companies have continued to advance their operations. For value investors, most of these companies already look more attractive – without factoring in the big news between cannabis companies and alcohol beverage giants.
While temperatures are about to start cooling in Canada, for the cannabis sector, we could be looking at a very hot Fall.
FULL DISCLOSURE: The Hydropothecary Corporation is a paid client of Stockhouse Publishing.