Corona announced that they will be investing about $4 billion in Canopy Growth Corp. Corona’s purchase will result in a 38% ownership stake in the marijuana cultivation company. The Wall Street Journal recently published an article about the partnership plans:
“[Corona’s] new deal follows an initial investment last year,when it took a roughly 10% stake in Canopy and said it would develop nonalcoholic, cannabis-infused beverages for Canada and other legal markets. The new partnership will include “a full suite of products,” [Corona CEO Rob Sands] said, but the company won’t introduce those products in the U.S. until allowed by federal law.”
Although Corona’s stock tumbled 6% on the day the partnership news was announced, August 15, 2018, Canopy Growth’s stock has risen from $24.62 on August 14th to it’s current price of $52.07. That’s 111% in 20 days. Canopy Growth’s market cap is currently around $11.5 billion.
Corona’s investment definitely creates a lot of enthusiasm about the possibility of big money flowing into the up and coming industry, but the boom in the marijuana sector started well before this news dropped. Buzz around cannabis stocks has been developing for years, following along with the legalization and deregulation of marijuana. Here’s a chart from a Seeking Alpha article showing how much money consumers have been spending on the legal market in North America over the past few years:
Investment in the sector’s companies has kept up with, and possibly bypassed, consumer spending. MarketWatch noted in this recent article that the current investment rates in the sector may be outpacing the sector’s actual value. The article explains a few signs of the possible bubble:
“A report that Smirnoff- and Johnnie Walker-maker Diageo PLC was in talks with at least three Canadian pot companies with the intent to purchase a stake or initiate a collaboration in one of them seemed to set off the buying frenzy Friday, and Monday’s trading saw Tilray Inc. gain more than 20% to $53.44, and Cronos Group Inc. stock rose 21%. Aurora Cannabis a Canada-based pot producer that doesn’t have a U.S. exchange listing, saw shares close 7.7% higher Monday.
Tilray went public at $17 in July, and Cronos listed on the Nasdaq exchange earlier this year and has rallied more than 50% year to date. The benchmark S&P 500 index has gained 8.4% this year.
“This is like bitcoin levels, the kind of move Tilray is making,” said Jason Spatafora, a cannabis investor who runs Marijuanastocks.com. “The market is completely irrational. [Tilray’s] market capitalization is over $4.5 billion. That’s insane. They don’t have as much cash as Canopy or Aurora. It shouldn’t trade at half that valuation.”
So is the new flow of money into weed stocks a bubble, or is it justified growth for an industry on the edge of a break through? If you look at the above mentioned chart that displays the consumer spending on legal Marijuana, it looks like a bubble. The combined market caps of just a hand full of companies can add up to much more than the actual money being spent by consumers in the legal market. However, I’m assuming a lot of the big money investors, like Corona, and most other investors are betting on the money in the illegal market eventually flowing into the legal market, multiplying the actual value of the sector and it’s companies. Depending on the value of the illegal market, the current growth might be justified, or even undervalued.
