Did Constellation Overpay for Its Marijuana Experiment?

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Weed stocks have been all the rage recently, as the result of some governments relaxing their restrictions on marijuana and its uses. While some companies like Tilray, Inc. (NASDAQ: TLRY) and Cronos Group Inc. (NASDAQ: CRON) have seen massive gains, there are others that bought into this industry that have lagged.

Constellation Brands Inc. (NYSE: STZ) happens to be the latter of these marijuana investors. Although this company primarily deals in vices that consumers drink, it wanted to offer the opportunity for consumers to get high as well.

Constellation Brands launched a strategic partnership with Canopy Growth Corp. (NYSE: CGC). According to deal announced in mid-August, Constellation Brands will increase its ownership interest in Canopy Growth by acquiring 104.5 million shares directly from the company, thereby achieving roughly 38% ownership.

Rob Sands, CEO of Constellation Brands, commented:

Through this investment, we are selecting Canopy Growth as our exclusive global cannabis partner. Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space. We look forward to supporting Canopy as they extend their recognized global leadership position in the medical and recreational cannabis space.

While this seems like a solid move into the “cannabis space,” analysts don’t think as highly of the deal. Here’s what analysts had to say about Constellation Brands since the deal in mid-August:

  • SunTrust Robinson Humphrey downgraded the stock to Hold and cut its price target to $220 from $260.
  • Susquehanna downgraded it from a Neutral rating to Negative.
  • Deutsche Bank reiterated a Buy rating but cut its target to $226 from $234.
  • Merrill Lynch reiterated a Buy rating but cut its price target to $235 from $250.
  • Jefferies may have been the one positive in the group, initiating it at Buy with a $283 target.

Shares of Constellation Brands closed Friday at $212.05, with a consensus analyst price target of $247.53 and a 52-week trading range of $197.32 to $236.62.

Tilray shares closed Friday at $109.05, with a consensus price target of $52.00 and a post-IPO range of $20.10 to $127.27.

Cronos closed at $10.38 a share, with a post-IPO range of $5.12 to $13.39.

Shares of Canopy Growth closed at $47.19, with a post-IPO range of $16.74 to $56.60.

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