What do Constellation Brands, Molson Coors, Diageo and Heineken have in common?
Okay, booze … that was the obvious answer.
But, there’s something else, and it’s on the tip of every investors’ tongue right now.
Cannabis.
These four companies are a major group of “sin” stocks, which cater to our “recreational” needs. These companies might focus on alcohol today, but they’ve found the next big trend: cannabis.
And by jumping into the cannabis industry, these major companies — worth approximately $200 billion total — open the door to massive investment and growth opportunities for this burgeoning sector…
Rejuvenating the Sin Industry
Giant beverage makers are jumping into marijuana in a huge way.
And it’s not too surprising since sales of beer and soda have slowed in recent years. In 2018, soda sales fell to a 30-year low. Major brewer Heineken also reported a decline of beer sales in the U.S.
The hope among beverage makers is that cannabis-spiked beer and wine will rejuvenate the beverage industry.
On August 15, giant beverage company Constellation Brands Inc. (NYSE: STZ) kicked things off by investing $4 billion into medical cannabis company Canopy Growth Corp. (NYSE: CGC). The deal gave Constellation a 38% stake in the company.
Since the announcement of the increased stake, the shares of Canopy Growth have soared 83%.
However, the optimism has some of the Canadian marijuana stocks priced far too high for their actual sales.
Not All Cannabis Companies Are Equal
Bloomberg reported that marijuana producer Tilray Inc. (Nasdaq: TLRY) had a net loss of $12.8 million on sales of $9.7 million in the second quarter this year.
The problem is that Tilray’s market value is $5.7 billion.
Currently, the company sells medical cannabis in 11 countries. It will supply recreational pot in Canada once it’s legal starting on October 17.
The company’s shares surged over 20% when the Constellation Brands deal hit. Investors believe that the producer will be in line for a beverage deal too.
But the company outgrew its sales. Today, it trades for 1,230 times projected 2018 earnings. To put that in perspective, we like to see stocks trade for less than 10 times earnings.
That means investors are pricing in enormous growth. That may not be entirely realistic.
The New Market for Cannabis
What companies — and investors — are looking for is a perfect marriage for new growth. And that next big market is cannabis-infused drinks.
The idea is that beverage producers will provide the marketing channels cannabis producers need to expand their markets.
That’s certainly the plan behind Constellation Brands’ acquisition. Forbes reported that the company spent hundreds of millions of dollars to develop a line of cannabis-infused drinks for the Canadian market.
Cannabis-infused drinks will be the way most folks consume marijuana in the future. Smoking just isn’t as popular as it used to be.
Imbibed cannabis could be worth more than $20 billion per year. That’s what the big beverage companies see coming.
That number is how giants like Constellation can justify investing $4 billion into a company that was only trading for $6 billion in total. The chart below shows Constellation’s year-over-year sales growth:
As you can see, 2018 was the company’s lowest year-over-year growth in more than five years.
The investment in cannabis is the strategic planning that can deliver high double-digit growth like the company saw in 2014 and 2015.
Invest Wisely
Constellation sees cannabis as a $200 billion retail market within 15 years.
That means enormous, double-digit growth every year for 15 years.
Constellation expects cannabis to perform similarly to the alcoholic beverage market. The plan is to create a single brand of cannabis to address all markets globally.
The takeaway for investors is simple: We need to invest in cannabis, but it’s important to do it wisely.
Video: The potential to make a fortune before marijuana is legal in all 50 states
