Cannabis stocks have become a hot commodity recently and many companies are looking to take advantage of this boom through a flurry of public listings. The problem for retail investors is determining which marijuana stocks make good investments. As with any high growth industry, the companies you see listed on the Canadian exchanges will not all be there in 5 years. Some will go under. There will most likely be acquisitions, and consolidation in the space leaving others to be industry leaders. As of today, there are approximately 25 TMX-listed companies that are directly involved in the cannabis industry. Of note, the TMX group operates both the TSX and TSX-Venture exchanges. Before we get into the top marijuana stocks in Canada, let’s go over some things that make the industry so promising.
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Let’s just say the marijuana industry has been…. well, rocky. We’ve seen the ultimate highs and the ultimate lows for those who purchased at those ultimate highs. It’s not unusual for the industry to see double-digit price swings in a single trading day! There is no other industry as volatile. A lot of people who are purchasing these stocks are buying them purely on hype, and possibly ignoring the fundamentals and the strengths of the companies themselves.
As always, when purchasing marijuana stocks it is absolutely crucial to do your due diligence. It’s a dangerous industry if entered at the wrong time, due to a lot of hype allowing these stocks to go much much higher than their true valuations would justify. As with any speculative industry, only proceed with money you can afford to lose and make sure to keep a keen eye on specific stocks you wish to track.
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Why marijuana stocks?
The pot rush can be explained in one word: legalization. Governments across the world are introducing legislation to legalize the recreational use of marijuana. In Canada, one of the key platforms that the current Liberal government ran on was the legalization of marijuana. On April 20, 2016, also known as 420-day for pot enthusiasts, the Government of Canada officially announced plans to legalize marijuana. Despite opposition, the legalization took effect this past October. There are more than 4 million users of marijuana in Canada and it is expected that 10% of these users will develop a dependency.
How many people use marijuana?
In 2016, Deloitte published a report that indicated at least 22% of adult Canadians use marijuana at least sometimes and about 17% are willing to try. Based on these numbers, they estimate that the recreational market can be valued as high as $8.7 billion. To satisfy this demand, the Parliamentary Budget Officer estimates that 650,000kg of recreational cannabis will be needed to satisfy yearly demand. It is estimated that the combined production and 2019 expansion projects of the 45 current medical marijuana growers in Canada is approximately 586,000 kg. The potential for explosive demand is what is driving investors into marijuana stocks.
What to look for?
It’s all about production and revenue growth. The majority of marijuana companies are not profitable, as such relying on traditional valuation metrics doesn’t make sense. Investors should pay close attention to these factors:
- Sales growth – Is the company meeting sales estimates? Or are they consistently coming up short? The majority of cannabis stocks are trading at crazy P/S valuations. As such, it is essential it can grow in line with expectations
- Production growth – Is the company achieving its expected production growth? Does it have a sustainable and realistic growth plan? How has it raised capital to expand operations?
- Partnerships – Does the company have any beverage or other types of partnerships? How many recreational marijuana agreements has it signed?
- Margins – Is it a low cost producer? Is the average sale price per gram stable, declining or growing?
- Profitability – I know, we mentioned that profitability is not essential. However, if the company is profitable, it is definitely a bonus and an encouraging sing.
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So where should you start? Here are the top 5 marijuana stocks in Canada
#5. CannTrust Holdings
Coming in at # 5 is CannTrust Holdings. CannTrust is one of the leading medical marijuana producers in the country. This section of the industry has gotten lost amidst the hype for recreational marijuana. The medical marijuana industry in Canada is valued at approximatley $1.2 billion. This is expected to double over the next five-years. Why is this important for CannTrust? Because Health Canada estimates that CannTrust is the fastest growing medical marijuana producer capturing 36% of all newly registered patients.
CannTrust is also one of the cheapest marijuana companies trading at a price of only 5.4 time 2019 sales estimates. Are 2019 estimates achievable? The argument can be made that CannTrust is one of the few that can realistically achieve forecasted revenue targets. Why? Because it is one of the few cannabis companies that has consistently met or beat analysts estimates. This is a rarity in the sector.
Finally, the company signed a very interesting deal with Breakthrough Beverage Group (BBG). BBG is a leading distributor of premium spirits, wine and beer brands. The deal will enable CannTrust to take advantage of BBG’s considerable logistics expertise.
Admittedly, outside of the big three marijuana stocks, it is difficult to predict which other companies will have long-term staying power. The reason for making Organigram’s inclusion on our list of the top marijuana stocks over the others is simple, it is one of the cheapest pot stocks on the index. The company is trading at a forward P/S ratio of 3.5, significantly below the industry average. As such, it is not dependent on posting blow-out numbers to justify its current valuations.
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The company signed a 2-year deal supply deal in its home Province of New Brunswick to supply cannabis to the recreational market in the province. This adds further growth potential to its current medical license. In addition to NB, it has supply agreements with Alberta, Manitoba, Ontario and PEI.
On top of supplying dried cannabis and oil products, through its exclusive agreement with TGS Colorado, the company is well positioned to take advantage of recreational edible products, which have rapid growth potential. Likewise, much like everyone on the list, the company is growing production capacity and is expected to reach 113,000 kgs by end of 2019. This is up from 36,000 kgs as of end of 2018.
#3. Aphria Inc
Aphria Inc. rounds up the ‘big 3’ top cannabis stocks on the Toronto exchanges. Aphria is one of the few profitable companies over the past two years, which is a rarity in this space. They consider themselves to be a low-cost producer and as per their latest quarter, increased revenue by 154% YOY.
Unfortunately, Aphria has been embroiled in several controversies as of late. It has been accused of paying a premium for acquisitions which had the net effect of lining insider pockets. Although none of these allegations have been proven, it has led to significant volatility in stock price. In January, the company announced that its CEO and co-founder would be stepping down from the board.
This is definitely a step in the right direction, but the company still needs to address the allegations at hand. Something it has not yet done. Likewise, there have been several shareholder lawsuits that have been filed against the company. It is for this reason the company isn’t ranked higher on this list. If not for these headwinds, it would have been ranked second on our list.
It is really unfortunate because the company is the cheapest of the big three, profitable and has been able to keep up with analysts lofty expectations.
#2. Aurora Cannabis Corporation
The runner-up on our top marijuana stocks in Canada is Aurora. Aurora, with a market cap of $8.51 billion, is also a well-known player in Canada’s medical marijuana industry. Through its many subsidiaries, Aurora has only recently entered the high growth cannabis oils market and the company expects sales to account for approximately 26% of revenues.
The company has been the most aggressive consolidator in the industry. As such, it now has the largest production capacity and is best positioned to meet demand. The only downside to its buying spree is that the company has been issuing shares to make these purchases. As such, it has had the net effect of shareholder dillution. It has been a big factor in the company’s 40% share price drop over the past year.
Aurora has agreements with Provinces from cost-to-coast for the sale of recreational marijuana. It is also estimated to own approximately 13% of Canada’s medical marijuana market. Its growth profile is not limited to Canada as it has entered international markets such as Australia and Germany.
#1. Canopy Growth Corporation
Canopy Growth remains best-in-breed. It is Canada’s largest with a market cap of $19.81 billion and has built a reputation as the industry leader. As such, its share price has been less volatile and far outperformed everyone on this list. In the past year, its share price has risen by 54%, the only one on this list aside from Organigram to have a positive trend. The company has similarly outpeformed over the past two-year and five-year time frames.
Canopy’s growth profile is not limited to Canada as it has significant international operations. It has various supply and distribution agreements with Jamaican, Spanish, and Denmark governments. These recent agreements add to its sector-leading expansion in Australia, Germany, Brazil, and Chile.
Furthermore, the company is preparing to enter the U.S. Hemp market with expected production captivity of 7K annually. New York is the first state to issue a licence to Canopy to produce and process hemp. You also can’t talk about Canopy without mentioning its industry-defining deal with Constellation Brands. It is the largest beverage deal in the sector and adds significant legitimacy to the company.
Simply put, Canopy is the safest play in the sector and remains at the top of our list.
So which of these stocks do you think will succeed, and which will go up in smoke? Did we miss one on the list? Let us know in the comments below! Make sure to take advantage of buying these stocks with your TFSA so you can enjoy tax free gains, including saving on things like capital gains!