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Stock Market News: Canopy Growth Gives Constellation Brands Another Loss

Dan Caplinger, The Motley Fool

The stock market got off to a good start on Monday morning, rebounding from a big drop on Friday. Investors seemed more willing to believe that trade negotiations between the U.S. and China could continue to make progress than they were last week. As of 10:30 a.m. EDT, the Dow Jones Industrial Average (DJINDICES: ^DJI) was up 101 points to 25,729. The S&P 500 (SNPINDEX: ^GSPC) gained 10 points to 2,857, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) picked up 40 points to 7,791.

The height of earnings season is over, but that doesn't mean that companies aren't paying attention to their prospects for sales and profit growth. In the marijuana stock arena, Canopy Growth (NYSE: CGC) has long been a leading cannabis company, and some see a lot more growth in its future. For Constellation Brands (NYSE: STZ), though, a significant minority stake in Canopy's stock has brought a big hit to its bottom line.

Analysts give Canopy a small boost

Shares of Canopy Growth were up just 0.5% Monday morning despite getting favorable comments from stock analysts. Seaport Global raised its rating on the cannabis cultivator from neutral to buy and set a price target of $31 per share.

Smiling man wearing hairnet and gloves while working with cannabis plant

Image source: Canopy Growth.

Seaport noted the fact that Canopy's stock has seen a big drop in recent months, as investors in cannabis generally have been a bit less comfortable taking on the risks involved in the high-growth industry. For Canopy in particular, the abrupt departure of former co-CEO Bruce Linton also introduced considerable uncertainty about the marijuana company's future strategic direction. In Seaport's view, however, the decline in Canopy's share price creates a good value opportunity, and the marijuana industry as a whole still appears to have good prospects.

Like many cannabis companies, Canopy is spending a lot of money trying to grow and sustain its leadership role in the space. Yet fundamentally, some trends at Canopy look troubling, including the decline in pricing power for recreational marijuana sales over the past few quarters.

Analysts believe that market participants have discounted Canopy's prospects too much. With the stock near its lowest levels in more than a year, those who like good value are starting to give the marijuana company a closer look.

Constellation counts its losses

In related news, shares of beer and spirits giant Constellation Brands were up just a fraction of a percent Monday morning. The company reported that it expects to take another sizable loss related to its multibillion-dollar investment in Canopy Growth, raising new questions about how the partnership is likely to evolve.

Constellation Brands said in a filing with the U.S. Securities and Exchange Commission that it will record an adjusted pre-tax loss of roughly $54.8 million in the current quarter because of Canopy Growth. Due to of the accounting treatment for Constellation's stake in Canopy, the beverage giant has to incorporate the marijuana company's impact on Constellation's financial results with a two-month gap. The loss brings the half-year total hit to Constellation's bottom line to $109.2 million, with tax benefits only offering a roughly 30% offset.

There's been a lot of news about the negative things that Constellation has said about Canopy, but the Corona maker has actually been pretty balanced about its views on the cannabis company. Despite concerns about financial results, Constellation likes that Canopy is aggressively making acquisitions and looking to enter the U.S. hemp market. CEO Bill Newlands still sees the Canopy investment as a long-term positive. No company likes to lose money, but Constellation still seems confident that Canopy Growth will pay off as an investment in the long run.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com