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Investors are flocking into marijuana stocks, but they've sought different ways to profit from the space. Some prefer to invest directly in companies that cultivate and grow marijuana, such as Aurora Cannabis (NYSE: ACB). Others are less comfortable with pure-play companies in the space, instead looking at companies like Constellation Brands (NYSE: STZ), which has a broader beverage business outside the cannabis space but has made massive investments in cannabis-focused company Canopy Growth.
A more diversified business like Constellation offers protection if the marijuana sector proves to be overhyped, but it also has more limited upside than Aurora does if cannabis takes off. With that in mind, though, you can evaluate both Aurora and Constellation to decide which stock offers the better potential trade-off between risk and reward going into 2019.
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Valuation and stock performance
Neither Constellation Brands nor Aurora Cannabis has done particularly well lately. Constellation stock has fallen 28% in the past year, but that's actually a bit better than Aurora's losses of 32% since January 2018.
For valuation purposes, the trouble with comparing Aurora with Constellation is that only one of the companies is profitable. The beverage-giant's trailing earnings are skewed somewhat by the impact of tax reform, but when you look at near-term future projections, the stock trades at about 16 times forward earnings. By contrast, Aurora trades at 90 times its trailing revenue over the past 12 months, showing the extremely high premium that investors are putting on the marijuana stock because of its growth potential.
Some would argue that trying to judge between these two stocks, based on valuation, isn't the appropriate way to compare their businesses. But if valuation means something to you, then Constellation's share price looks a lot more reasonable -- even if it means giving up some of the potential upside from purer-play cannabis exposure.
Partnerships
To succeed, many marijuana producers have teamed up with companies outside the industry to gain expertise in areas like marketing and distribution. That's been Constellation's approach to the space, making a huge $4 billion investment in Canopy Growth last summer. The move gives Constellation a stake of between 35% and 40% in Canopy, along with the right to take a majority stake if it chooses to exercise warrants it obtained in the deal.
So far, Canopy hasn't been able to avoid the share-price declines that have plagued the entire industry, and that's reduced the value of the investment that Constellation made in the company. Yet for Constellation investors, it doesn't really matter whether Canopy ends up developing cannabis-infused beverages. Even if the marijuana company focuses mostly on cannabis-derived oils and dry marijuana production, which doesn't really dovetail with Constellation's beverage business, the spirits maker will still stand to benefit from its investment if Canopy can find future success.