Wall Street traders can be jittery, but a knee-jerk reaction of the markets is giving savvy investors a great chance to own even more of this cannabis pioneer.
Wall Street traders can be jittery.
Every quarter they parse companies’ earnings releases looking for any small restatement, decline in revenues, or slightly unexpected expense.
If any of those numbers miss the mark, they sell.
The result is usually a sharp decline in the company’s stock price.
But these sharp, reactive sell-offs are often temporary. For a patient, long-term investor with an eye on owning great companies, they’re opportunities to add to their holdings and build even more wealth.
Well, this giant beer brand, a company with the most substantial investment in cannabis yet, just reported slightly disappointing earnings.
And the knee-jerk reaction of the markets is giving savvy investors a great chance to own even more of this cannabis pioneer.
At least for those that can act quickly…
Sell-Off in Constellation Brands Is Great Opportunity to Increase Stake
Constellation Brands Inc. (NYSE: STZ), the owner of popular beer brands like Corona and wines like Kim Crawford and Robert Mondavi, reported a decline in third-quarter earnings from the year prior. The stock sold off more than 10% on the news and still hasn’t fully recovered its pre-earnings release price.
We first recommended Constellation to you back in October as a free pick. We recommended at the time to use any pull-back in the price to add to your position – and this is one of those times.
I started covering the company back in the ’90s, and I’ve been a fan ever since. Constellation is the best company at managing product brands I’ve ever seen, continuously adjusting its portfolio in anticipation of changing consumer tastes.
In fact, during the company’s conference call to discuss the earnings announcement, management described the changes they are making to its offering of wine brands. Wine drinkers are shifting to more premium-priced wines, so management – in typical fashion – is not hesitating to adapt.
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The company’s investment in the cannabis market is also part of that same forward-thinking spirit.
To date, no single investor has made as big a commitment to cannabis as Constellation Brands.
In November, the company closed on a $4 billion investment in Canopy Growth (NYSE: CGC, TSX: WEED), giving it a stake of about 37%. Sales of alcoholic beverages across the entire industry are not growing nearly as fast as they used to, so Constellation made the bold leap into cannabis to maintain the type of growth to which its investors have become accustomed.
I have also always loved the executive team’s relentless commitment to making decisions that are in the best interest for shareholders, and based on what they expect from their Canopy investment, long-term investors have much to gain.
Canopy Investment Will Quickly Boost Constellation Brands Stock
No doubt, $4 billion is a big commitment. Constellation had to borrow money to make the investment, and the interest expense associated with that debt was partially responsible for the earnings decline.
But it’s the massive revenue potential in cannabis that caught management’s eye in the first place.
For companies like Constellation that generate a lot of cash-flow and are laser-focused on maintaining high profit margins, they are always looking for revenue that will flow to the bottom line quickly.
When revenues grow as expected, management takes care of investors by increasing dividend payments and buying back stock.
Management stopped their stock buybacks and dividend increases when they made their investment into Canopy because of the debt required and their commitment to keeping an investment-grade debt rating. But after this quarter the company announced that it plans to return $4.5 billion to Constellation’s investors over the next three years. That’s more than double the amount which would be accounted for by the current dividend alone, so we can expect a higher dividend or renewed share buybacks.
Even with this commitment, management still expects to exercise its Canopy warrants. This will bring its ownership of Canopy above 50%. Constellation is already up on its Canopy investment and the warrants in the money. In fact, a special irony of the decline of Constellation’s stock is that the stock of their biggest investment – Canopy Growth – is up 42% in just the first two weeks of this year.
If there was ever a time to add to your position in Constellation Brands, this is it.
Thanks for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
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