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Constellation Brands 'still bullish' on pot as value of Canopy stake falls

Beverage can labels seen during a tour at a Canopy Growth facility that produces cannabis derivatives in Smiths Falls, Ontario, Canada October 29, 2019. REUTERS/Blair Gable

Constellation Brands (STZ) has not lost faith in the battered cannabis sector after a US$534 million decline in the value of its stake in Canopy Growth (WEED.TO)(CGC), the beer and wine giant said as it reported fiscal third quarter results on Wednesday. 

Shares of the Smith Falls, Ont.-based pot producer have fallen more than 60 per cent since late April amid a broader downturn in the legal cannabis sector.

Speaking on a conference call with analysts, Constellation Brands CEO Bill Newlands said he is “still bullish” on legal cannabis in Canada.

Constellation Brands owns roughly a 38 per cent stake in Canopy Growth, making it the largest shareholder of Canada’s largest producer of legal cannabis.

Newlands said he is encouraged by consumer conversion to the legal market, the prospect of more stores in Ontario, and “significantly” increasing retail sales across Canada over the past 12 months. He expects the release of new cannabis 2.0 products to further that trend. 

Canada allowed sales of products including vapes, topicals, edibles and drinks in mid-December. The new crop of items are slowly trickling into stores

“We couldn’t be more excited to see these products in the marketplace, as Canopy will now have the ability to showcase their best-in-class brands and intellectual property,” Newlands said.   

The Victor, N.Y.-based company’s $5 billion investment in Canopy Growth in August 2018 ignited a blistering rally for pot stocks. Investors saw the entrance of a major U.S. firm as a resoundingly positive signal for the sector. 

Constellation Brands said on Wednesday that it does not currently plan to make any more cash contributions to the cannabis firm. However, the company holds warrants to buy additional Canopy Growth shares, including some priced below Canopy's current share price.

The beverage company’s chief financial officer, David Klein, became CEO at Canopy Growth last month and will begin leading the company shortly.

“I believe he will bring more focus and discipline to that business in executing their priorities,” Newlands said. 

The leadership change came after the booze company said it was "not pleased" with Canopy Growth's earnings after a wider-than-expected net loss last June.

Constellation Brands accounts for its Canopy Growth investment on a two-month lag.

Toronto-listed shares of Canopy Growth fell 2.84 per cent to $25.01 at 11:17 a.m. ET.