lundi 17 septembre 2018

A safe way to invest in pot?

A few weeks ago, Robin Speziale got bullied on his facebook page for his investment in Canopy Growth (WEED.TO). If my love for Robin wouldn't have been unconditional, I'd probably have participated in this exercice.

Everybody with little investment knowledge knows that these weed stocks are valued like if they would be the next big thing after the Iphone and, more, be very very lucrative businesses.

Two things that pot isn't. 

At this moment, Canopy Growth has a market cap of 14,5B$, which is equivalent to the market cap of Carmax (14,1B$). The difference is that Carmax is an established business with great revenues and Canopy Growth is a new name that makes no profit. Or, on a canadian level, Canopy has almost the same market cap as Lassonde + Stella Jones + Metro. That's fucking crazy.

Even if everything that touches weed is crazy, there's probably a safe way to play marijuana. Well, nothing is never entirely safe, but there's a business that has invested a lot of money in WEED.TO but has great revenues even without weed.

The company is Constellation Brands (STN). They sell mostly beers and wines (Corona is one of their products).

These numbers show how great this company is:

Forward PE: 20
Current ROE: 26
Average ROE last 5 years: 25
Annual Sales growth last 5 years: 22%
Annual EPS growth last 5 years:  37%
EPS growth last year: 72%
Debt level: high
Stock performance last 5 years: 257%
Stock performance last 10 years: 896%

The only problem with this stock is the debt level. Everything else looks great. Because that company is not dependant on pot to make money. And people will always drink alcohol and even more in recession times.

Constellation Brands now owns 38% of Canopy Growth via these investments:

In august, 2018, they invested 5B$, buying shares for 48$
In october 2017, they invested 245M$, buying shares for 12,80$.
A share of WEED.TO is currently selling for about 63$.

The history of the stock market is full of companies trying to find growth in crazy ways. I'm not sure that Constellation Brands isn't on thin ice. But, at least, they're not dependant on pot to make money and they're gonna survive even if Canopy Growth goes bankrupt tomorrow.

So, it would be stupid to have a 10% position on that kind of stock, but 2-3% of a portfolio would be a funny ride besides your boring Berkshire Hathaway. 

4 commentaires:

  1. Constellation Brands WAS a great company...until they invested too much money in a weed stock. LOL
    With Trump ramping up the trade war with China, I'm worried about solid companies doing well. We have rising interest rates, markets near all time highs, a bull market that has been going on for years and Trump's trade war against China and the world. I'm not holding any high p/e stock any more. I need to see a PEG ratio under 1 to invest in these messed up times. You better have a defensive portfolio. The emphasis is about to go from growth to value really quickly.

  2. The weed stock valuations are laughable. I just bought BUD (which owns Corona) irt has debt but offset by lots of cash flow and a good dividend. Heineken same. Both much better values imo than Constellation B.

  3. I think that Constellation Brands is a great company with or without weed. Weed adds some some risk on the value of the company but not on it's capacity to make money. That's a big difference.

  4. Yes, Canopy is a speculative stock but many stocks are until they aren't. By the time they aren't you've missed out on the biggest gains. A decision to buy or not buy a stock is a bet on the future. The potential of marijuana and hemp is enormous. It goes past the getting high aspect of it that many can't see past. None of these marijuana stocks are a sure thing. You can label it as gambling or speculation and not investing but it's just semantics. It's investing with a different risk to reward profile.