As the legal medical marijuana industry in Canada has taken off, a small group of stocks of marijuana growers has vaulted to multibillion-dollar market caps. Other Canadian marijuana stocks, however, haven't become that highly valued. Canopy Growth Corporation (NASDAQOTH:TWMJF) is an example of the former group, while Organigram Holdings (NASDAQOTH:OGRMF) belongs to the latter category.
But current market cap and past performance aren't good predictors of future success. Which of these two marijuana stocks is the better pick now? Here's how Canopy Growth and Organigram compare.
The case for Canopy Growth
Canopy Growth stock has nearly tripled over the last 12 months. What's important to understand with respect to the argument for buying the stock is why that has happened.
One reason behind Canopy Growth's tremendous performance is that the company has emerged as the leader in medical marijuana sales in Canada. In its latest quarter, Canopy reported all-time high medical marijuana revenue of 21.7 million Canadian dollars, most of which was made in its home country.
In addition to its Canadian success, Canopy Growth has established a solid international presence. The company acquired MedCann GmbH in 2016, a German medical cannabis distributor. Germany presents a significant opportunity. Canopy also has operations and/or partnerships in other international markets, including Australia, Brazil, Chile, Denmark, Jamaica, and Spain.
Canopy Growth is the only marijuana grower so far to form a close relationship with an S&P 500 company. In October, Constellation Brands (NYSE:STZ), which markets Corona beer and other alcoholic beverages, bought a 9.9% stake in Canopy for $245 million. Constellation plans to work with Canopy to launch a cannabis-infused beer.
Probably the biggest factor pushing Canopy Growth stock higher, though, is the anticipation of Canada legalizing recreational marijuana later in 2018. Canopy has aggressively prepared for the milestone by beefing up its production capacity and securing supply license agreements for recreational marijuana with several Canadian provinces.
These reasons for Canopy Growth's past success also reflect why to buy the stock now. The global medical marijuana market continues to grow. Canada's recreational marijuana market presents a massive opportunity. The support of a major company like Constellation Brands gives Canopy an advantage that rivals don't have.
The case for Organigram
Organigram Holdings stock has nearly doubled over the last 12 months. Several of the catalysts for Canopy Growth have also fueled Organigram's impressive performance.
The company's medical marijuana sales in Canada are booming. In the quarter ended Nov. 30, 2017, Organigram reported revenue of CA$2.7 million, a year-over-year increase of 20%. Between January 2017 and January 2018, the company's number of medical marijuana patients jumped 495%.
Although Organigram has focused on selling in its domestic market rather than in international markets, the company hasn't closed its eyes to different kinds of opportunities outside of Canada. For example, Organigram signed an exclusive agreement with Colorado-based TGS International in 2016 to distribute The Green Solution marijuana products in Canada.
Like Canopy Growth and other marijuana growers, Organigram is expanding its capacity in anticipation of surging demand after Canada legalizes recreational marijuana. The company will soon have annual production capacity of 36,000 kilograms. Organigram expects its capacity will increase to 113,000 kilograms annually by April 2020.
Perhaps the most compelling reason to buy Organigram stock is its valuation. No, Organigram isn't cheap right now by any stretch of the imagination. However, as my colleague Sean Williams wrote recently, the company's growth prospects could make it "the only marijuana value stock."
My view is that both of these stocks should generate nice gains over the next few years as Canada's recreational marijuana market opens and as the global medical marijuana market expands. However, I suspect that capacity will be king. Companies with greater capacity will probably see their stocks rise faster than those with less capacity. Because of this, I think Canopy Growth is the better choice.
Over the longer run, supply will catch up with demand. That's when retail prowess will become much more important. Canopy seems likely to have an advantage on that front also, particularly with its ties to Constellation Brands.
Investors should keep in mind, however, that buying marijuana stocks definitely come with risks. Enormous growth is already baked into the stock prices -- even for a "value marijuana stock" like Organigram. If the sizes of marijuana markets aren't as great as anticipated, both Canopy Growth and Organigram stocks could go down as fast as they've gone up.