The North American marijuana industry is budding in a big way. Sure, that may sound corny, but expected legal sales growth of 26% per year through 2021 isn't something that investors are laughing at. They're enjoying big gains from the companies directly affected by the expansion of the marijuana industry, and cashing in on some serious green!

A majority of marijuana stocks with a market cap in excess of $200 million (i.e., above the highly volatile micro-cap level) have at least doubled in value over the past year, if not moved even higher. This is a result of Mexico's legalization of medical cannabis, Canada's coming legislation that could legalize recreational pot by July 2018, and a number of U.S. states' plans to put recreational weed on the ballot in the November 2018 election.

A surprised man reading the financial section of a newspaper.

Image source: Getty Images.

Finding value among marijuana stocks is possible

But as investors, we aren't taught to just throw a dart at an industry and buy whatever stock the dart lands on. Instead, we're driven to find value, even among an industry that's seen most stocks double or triple in recent months. Perhaps the best way to locate that value is by examining a company's forward price-to-earnings ratio (i.e., its current share price divided by its expected profit per share in the next fiscal year). As is almost always the case with the P/E ratio, the lower the number, the better value investors might be getting.

So, what high-growth marijuana stock has the lowest forward P/E ratio? Get ready to be surprised.

These weed stocks aren't even close

First, let's get some of the pot stocks that were disqualified out of the way. The following companies are either expected to lose money in 2019, or Wall Street simply hasn't chosen to initiate earnings coverage on them yet:

  • GW Pharmaceuticals (NASDAQ:GWPH)
  • Cara Therapeutics
  • Corbus Pharmaceuticals
  • Medical Marijuana, Inc.
  • Axim Biotechnologies
  • Zynerba Pharmaceuticals
Cannabis leaves lying next to test tubes and other biotech lab equipment.

Image source: GW Pharmaceuticals.

You'll note GW Pharmaceuticals here, which is often either the largest or second largest marijuana stock by market cap, depending on share-price volatility within the industry. GW Pharmaceuticals is dependent on lead drug Epidiolex being approved by the Food and Drug Administration to treat two rare forms of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. In particular, GW Pharmaceuticals' Epidiolex tripled the reduction in seizure frequency from baseline (39%) relative to the placebo (13%) in Dravet syndrome patients. If approved, it could generate in the neighborhood of $500 million in peak annual sales and push GW into the black. However, profitability isn't expected until 2020. 

Profitable, but sporting really high forward P/E ratios

There are also a number of marijuana stocks (mostly Canadian) that are expected to be profitable in fiscal 2019, but which should be sporting some very high forward P/E ratios. For comparison, the current P/E ratio of the S&P 500 is around 23.

  • Canopy Growth Corp. (NASDAQ:CGC): 495.7
  • Cronos Group: 324.7
  • Aurora Cannabis (NASDAQ:ACB): 80
  • CanniMed Therapeutics: 77.8
  • Aphria: 74.8
  • MedReleaf: 68.5

As you'll probably note, these are all growers, with the exception of Cronos Group. With Canada appearing to be on the verge of legalizing recreational weed, and Health Canada reporting medical cannabis patient growth of 10% per month as of May 2017, capacity expansion has been a top priority. However, expansion comes with a price -- a hefty price that weighs heavily on the margins of most marijuana stocks.

An indoor commercial cannabis grow farm.

Image source: Getty Images.

For instance, Canopy Growth Corp. is expected hold the highest market share of the recreational and medical market, yet will only be marginally profitable based on 2019 estimates from Wall Street. The reason is that it constantly has to spend money on growing its capacity. It has 2.4 million square feet of greenhouse facilities under construction or in developing in British Columbia right now, and has the option to add another 1.7 million square feet in B.C. if need be. This added capacity means extra costs for the company, weighing on its profitability. 

Another side effect for many Canadian marijuana stocks is dilution as a result of bought-deal offerings. A bought-deal offering is where common stock is sold to an investor or institution prior to the release of a prospectus. While it's good in the sense that pot companies are having no issue raising capital, these bought-deal offerings are inflating the outstanding share count of publicly traded companies and diluting investors. For example, Aurora Cannabis's share count has jumped from 16.1 million in mid-2014 to over 375 million in its latest quarter. That makes it really tough to turn profits into meaningful earnings per share. 

The standout from the crowd

Remember that surprise I teased earlier? Well, here it is.

The marijuana stock with the lowest forward P/E ratio is none other than OrganiGram Holdings (NASDAQ:OGI). My bet is this wasn't your first, or even 10th guess. Wall Street's average 2019 EPS forecast suggests that OrganiGram has a forward P/E ratio of just 27.3. That is cheap relative to its peers.

An bottle of cannabis oil next to a cannabis leaf.

Image source: Getty Images.

In October, OrganiGram announced a bought-deal offering that raised a little over $39 million, providing the relatively small grower an opportunity to nearly triple its square footage at the Moncton, New Brunswick, location to 429,000, and potentially boost production from 20,000 kilograms of annual dried cannabis production to 65,000 kilograms. That OrganiGram has chosen to expand at just a single site is one reason it's been able to keep costs down.

The other factor at play here, which is also true for MedReleaf, is that OrganiGram has turned its focus to extracts and cannabis oils, rather than purely focusing on dried cannabis. Though demand for dried product is greater, margin is much juicier for oils and extracts. By broadening its product portfolio, it's able to earn more in profit with less in sales. 

Obviously a lot can happen between now and 2019, so don't consider these figures as static. But at this point, OrganiGram Holdings might offer the best value among marijuana stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.