In case you haven't noticed it, the marijuana industry is awash in deal-making. A couple of major deals involving Aurora Cannabis (ACB -3.65%) and Canopy Growth (CGC -18.57%) have attracted headlines. But there have been plenty of smaller deals that have flown beneath the radar screens for many investors.
Aurora and Canopy have emerged as the "kings of deals" in the marijuana industry, both in size and volume of acquisitions and partnerships the two medical marijuana growers have made. What's behind the frenzy of deal-making -- and is buying these stocks a good deal for investors?
Crowning the kings
Let's first look at the two "kings of deals" among marijuana stocks. Canopy Growth's most highly publicized agreement, of course, was with major alcoholic beverage maker Constellation Brands (STZ -4.34%). In October, Constellation announced that it was buying a 9.9% stake in Canopy Growth for $245 million. In addition, the two companies planned to work together in launching a cannabis-infused beer.
But while that was the most visible deal for Canopy Growth, the company has done plenty more. Over the last several months, it's bought smaller medical marijuana grower Mettrum Health and purchased a big stake in Canadian cannabis company TerrAscend. In addition, it partnered with Spanish pharmaceutical company Alcaliber, which specializes in controlled substances, and formed a joint venture with Danish Cannabis to expand into the Denmark medical marijuana market.
Meanwhile, Aurora Cannabis made waves last month with its proposed acquisition of CanniMed Therapeutics (NASDAQOTH: CMMDF) for more than $550 million (in Canadian currency). CanniMed is fighting the takeover, however, with the company adopting a poison pill and appealing to the Canadian government to block Aurora's acquisition attempt.
As with Canopy Growth, though, Aurora has been busy making other deals. The company recently completed acquisitions of greenhouse engineering and design consultancy Larssen and medical marijuana producer H2 Biopharma. In April, Aurora bought Peloton Pharmaceuticals, a Quebec applicant for growing medical marijuana in Canada. The following month, Aurora acquired German medical marijuana supplier Pedanios. In October, the company completed acquisitions of BC Northern Lights Enterprises Ltd. and Urban Cultivator. The former sells systems for improving indoor cultivation of cannabis, while the latter markets indoor gardening appliances.
Aurora Cannabis has also bought stakes in several other companies in recent months. In September, Aurora invested in Hempco, which focuses on developing hemp foods, hemp fiber and hemp nutraceuticals. Earlier this month, the company increased its investments in Radiant Technologies, which has a patented microwave assisted processing system for improving quality and quantity of cannabis crops, and in Australian medical marijuana company Cann Group.
More on the way
There are three major reasons why even more deals could be on the way for both Canopy Growth and Aurora Cannabis. One is that legalization of recreational marijuana is on the way in Canada. Big players in the medical marijuana market like Canopy and Aurora are scrambling to beef up their production capacity in order to meet what is expected to be high demand.
Another factor is the increasing number of countries across the world that are legalizing medical marijuana (and, in some cases, recreational marijuana). Several of the deals made by Aurora and Canopy in 2017 involved expansion into new international markets. It wouldn't be surprising to see more of these kinds of acquisitions and partnerships.
Then there's the potential for more alcoholic beverage makers to make investments in and partner with marijuana growers like Constellation Brands did with Canopy Growth. A recent study found that alcohol sales declined in U.S. counties where medical marijuana was legalized. I suspect some of Constellation's peers are watching this data, as well as Constellation's partnership with Canopy, and could look to forge their own partnerships with marijuana companies.
Good deals for investors?
While Aurora Cannabis and Canopy Growth deserve to be crowned as the kings of deals in the marijuana industry, are these two stocks themselves good deals for investors? It depends on what kind of deal you're looking for.
Neither stock is a bargain, by any stretch of the imagination. Aurora Cannabis shares trade at nearly 142 times trailing-12-month sales. Canopy Growth stock trades at 78 times trailing-12-month sales. To call these valuations astronomically high would be an understatement.
However, if you believe some of the estimates about the potential size of the Canadian recreational market, both Aurora and Canopy could be good picks. The lowest projection that I have seen for this market is $4.2 billion annually, with the highest figure close to $12 billion. Even if the pessimistic number is used, both Aurora Cannabis and Canopy Growth, as two of the largest marijuana growers in Canada, appear poised for tremendous sales growth in the years to come. The deals the companies have undertaken so far in 2017 set them apart from most of their rivals.
My view is that both of these marijuana stocks are in store for a tremendous year in 2018. Yes, they're incredibly expensive, but they also have incredible growth prospects. For investors willing to take on some risk and who don't have qualms about owning stakes in companies that plan to sell recreational marijuana, Aurora Cannabis and Canopy Growth could be big winners.