What are the two hottest marijuana stocks on the market?
Aurora Cannabis (ACB -0.67%) and Emerald Health Therapeutics (EMHT.F) take the honors over the past six months. Aurora stock jumped over 220% during the period, while Emerald stock soared more than 290% higher. Both stocks have pulled back significantly since late January, however.
With the rapidly changing dynamics in the cannabis industry, which of these two marijuana stocks is the better pick for investors now? Here's how Aurora Cannabis and Emerald Health stack up against each other.
The case for Aurora Cannabis
When it comes to buying the stock of a Canadian marijuana grower, there are three key factors to consider. One is the company's track record and future potential in the domestic medical marijuana market in Canada. Another is the company's capability to capitalize on the global medical marijuana market. The third factor is how well the company is positioned for planned legalization of recreational marijuana in Canada.
Aurora Cannabis has an outstanding track record so far in the Canadian medical marijuana market. The company posted strong sales growth in its latest quarterly results. Aurora tripled its revenue from the prior-year period. Sales jumped nearly 42% from the previous sequential quarter.
Most of Aurora's revenue stemmed from the domestic medical cannabis market. However, the company's Pedanios subsidiary contributed 21% of Aurora's total revenue. Pedanios supplies medical cannabis in Germany and in other European countries. With more than double the population of Canada, the German market presents a huge opportunity for Aurora and other Canadian marijuana growers.
Aurora is also preparing for Canada's anticipated legalization of recreational marijuana in a couple of important ways. The company signed a letter of intent to supply cannabis for the Quebec adult consumer market. Aurora partnered with Liquor Stores N.A. Ltd. in a deal where Liquor Stores will convert some of its existing liquor stores into cannabis retail stores and open up new cannabis retail stores.
Perhaps the most important step that Aurora has taken is to expand capacity. The company has several expansion projects in progress. It has also secured supply agreements with other marijuana growers. And Aurora will soon fully complete the acquisition of Cannimed Therapeutics. These actions provide the company with funded production capacity of more than 280,000 kilograms per year.
The case for Emerald Health Therapeutics
Let's now look at Emerald Health's profile in the same three areas, starting with the domestic medical cannabis market. Emerald Health has enjoyed even more impressive sales growth than Aurora. In Emerald's quarter ending Sept. 30, 2017 -- the latest quarter for which data is currently available, sales increased a whopping 332% year over year. Keep in mind, however, that Emerald Health's revenue is less than 2% of what Aurora makes.
For now, at least, Emerald Health's focus appears to be solely on the Canadian market. Unlike several of its larger peers, Emerald doesn't have an international presence and hasn't announced any plans to target other markets outside of its home country.
But Emerald Health is certainly eyeing the significant potential with coming recreational marijuana legalization in Canada. The company embarked on a multiphase expansion plan. Emerald Health also formed a joint venture with Village Farms, a large producer of greenhouse-grown fruits and vegetables. The joint venture between the two companies expects to have 500,000 square feet of a 1.1 million-square-foot facility converted to growing cannabis by the end of 2018.
Emerald Health isn't just into growing cannabis. It's also interested in meeting other needs of the cannabis industry. The company signed a deal in January with DMG Blockchain Solutions to form a joint venture to develop a blockchain-based supply chain management system and e-commerce marketplace tailored for the cannabis industry.
I think the most successful marijuana stocks will generally be those of companies that (1) have the most capacity, (2) are well positioned to market to retail consumers in Canada, and (3) supply international markets. Aurora Cannabis appears to have a clear advantage over Emerald Health in all three areas. I think Aurora is the better choice between these two marijuana stocks.
However, buying any marijuana stock is a risky proposition. Valuations are through the roof because of anticipated sky-high demand. If demand isn't as great as predicted, the stocks will crater. It's also only a matter of time before supply catches up with, and exceeds, demand. When that happens, weaker marijuana stocks are especially likely to get clobbered.