Constellation Brands Inc's (STZ) earnings sent the stock soaring over 5% on Thursday, but not all the shareholders were thrilled with the company's big bet on cannabis and its massive deal with Canopy Growth Corporation (CGC)
Brian Nelson, President of Investment Research at Valuentum, an Illinois-based investment research firm, is remaining cautious on the cannabis catalyst as well, especially given Constellation's debt load.
"Constellation's Canopy deal will add another $4 billion in debt to a balance sheet that already has a long-term debt load of nearly $10 billion as of August 2018," he said. "The company will have to continue to generate copious amounts of free cash flow and perhaps slow buybacks to deleverage in the future, in our view."
He added that there are a number of variables in the cannabis space that have to be sorted out.
"Sizing up the long-term cannabis opportunity given policy risks and then shaking out who will have the corresponding market share across verticals will be an inexact science so early in the adoption curve, particularly as many of the smaller companies may be money-losing endeavors," he explained.
Shareholders also told Real Money that the brand-new status of teh cannabis industry makes it hard to accurately factor in for Constellation.
"It's such a nascent area that its really hard to model," Ian Browning, portfolio manager at Peddock Capital Advisors, a Braintree, Massachusetts-based advisory firm told Real Money.
His firm oversees a total of $200 million in its equity accounts, which includes 20,679 shares of Constellation Brands.
"Obviously making such a big bet on Canopy Growth is something we've been watching on the risks," he explained. "It could be a compelling investment, but it's just hard to model the impact right now."
To be sure, the cannabis question marks are not scaring him or his firm off of the stock.
"I still really like the stock," he said. "This is a really outsized position for us already, so we're not adding to it, but we're also definitely not reducing it."
Browning said that for now his firm is focusing on solid performance in beer and wine as cause to remain positive on the stock, aside from the budding cannabis segment.
He added that if Attorney General Jeff Sessions departs from his post, his opinion on cannabis' potential would be much more positive.
To be sure, other notable commentators are less reticent.
Jim Cramer told TheStreet's Katherine Ross this morning that cannabis could be Constellation's biggest story in the future.
"It's going to be cannabis," he said. "I am a believer that this is one of the great secular stories of our time."
Canopy Growth stock is down 2.4% as of 3:16 p.m. in New York. The company posted a 100% return since its deal with Constellation was announced.
Nobody can deny that Constellation's early move has paid off nicely, at least so far.