viewCanopy Growth Corporation

Why Canopy Growth’s deal with Constellation was the best - and worst - thing for the shares

Trader and market watcher Tim Collins says the deal gives Canopy long-term stability but loses some its thunder compared to stocks like Tilray

Cannabis plant in the sun
Bet on the company with money in the bank rather than money on paper, says the veteran trader

For Canadian cannabis company Canopy Growth Corp (NYSE:CGC, TSX:WEED), an additional US$4bn investment from beer producer Constellation Brands Inc (NYSE:STZ) may have felt like a godsend, boosting its shares double digits after less-than-impressive quarterly results.

However, trader and market commentator Tim Collins said the deal may be the worst thing to ever happen to Canopy in the short-term, shaping the company’s narrative in a way that makes unattached Tilray Inc (NASDAQ:TLRY) the more appealing cannabis stock.

“Everyone loves a mystery; the excitement of the unknown, the potential of what may come,” Collins told Proactive Investors in an email. “Without a deal, bulls can dream about whatever potential fits their narrative.”

The deal gave Constellation a 38% stake with the option to scoop up even more shares, bringing its ownership stake to 50%.

READ: Cannabis short-sellers may be forced to cover soon as huge losses pile up, says S3 Partners

Constellation can buy another 88.5 million shares for just over US$40 per share and then an additional 51.3 million shares at the volume weight average price at the time of exercise.

“The potential for a ‘dream’ deal is gone. Pushing shares speculatively higher loses appeal when Constellation can buy them ‘below’ market. Would they quickly sell? Probably not, but you can never say never,” said Collins.

Canopy secured long-term stability via its deal, but lightning almost never strikes the same place twice.

It’s unlikely another deal like this will come its way, shifting investor attention to the potential of other cannabis stocks, like Tilray.

“Anticipation flew past unabated excitement straight into delirium and short-squeezes,” said Collins, who is well-known for his options trading strategies.

However, don’t expect Canopy Growth to go up in smoke anytime soon.

READ: StoneCastle Cannabis Growth Fund gives investors exposure to high-flying cannabis stocks

When comparing the two cannabis companies, Collins notes that at the end of the day, Canopy has the money in the bank.

Tilray has the higher market cap but Canopy has US$4bn in cash while Tilray’s balance sheet is less impressive.

The company raised around US$150mln in its initial public offering in July, but Collins forecasts a secondary offering on the horizon if Tilray doesn’t land a multi-billion dollar deal of its own.

“It's going to need a doozy of a deal to keep the price elevated. It's simply hard to imagine any big name will pay significantly more in terms of valuation than what Constellation paid for CGC,” said Collins.

For those debating between Canopy Growth and Tilray, Collins said that he would bet on the company with money in the bank rather than money on paper.

--At the time of publication, Collins had a position in Tilray put butterfly options

Quick facts: Canopy Growth Corporation

Price: 28.91 CAD

Market: TSX
Market Cap: $10.11 billion

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