Two of the best-performing stocks of 2017 were Canadian marijuana growers Cronos Group (CRON 1.42%) and Emerald Health Therapeutics (EMHT.F). It's a different story so far in 2018, though. Both Cronos and Emerald Health stocks are down by at least 20%.
Will the downturns for these marijuana stocks continue throughout the rest of the year? Probably not. Cronos Group and Emerald Health have several potential catalysts on the way. Which of these two stocks is the better pick for investors looking to the future? Here's how Cronos and Emerald Health compare.
Image source: Getty Images.
The case for Cronos Group
Let's first address a major negative for Cronos Group. The company reported a deteriorating bottom line in its Q1 results announced last week. This bad news probably shouldn't be overly concerning, though. Cronos' revenue soared 473% year over year. The wider net loss stemmed from the company's increased spending. Higher spending makes sense in light of what could be in store for Cronos later in 2018.
I'm referring, of course, to the anticipated legalization of recreational marijuana in Canada. The Canadian Senate is scheduled to vote on June 7 on a bill that would allow the adult use of recreational marijuana throughout the country. Assuming it passes -- and that seems very likely -- Canadians could begin purchasing marijuana for recreational use by late summer.
Cronos has been scrambling to add more production capacity in anticipation of the expanded domestic market. The company is close to completing an expansion at its Peace Naturals facility. Cronos is also building a greenhouse in Israel and an indoor facility in Australia. These efforts should enable the company to boost its annual production capacity to over 47,000 kilograms before 2019.
Adding capacity isn't the only way that Cronos is preparing for the recreational marijuana market in Canada. In March, the company formed a joint venture with MedMen, a prominent U.S. marijuana brand. The two companies will launch retail outlets in Canada to market recreational marijuana assuming there are no problems preventing legalization efforts.
Cronos isn't just looking to expand on the homefront. The company inked a distribution deal with G. Pohl-Boskamp GmbH & Co., a European pharmaceutical manufacturer and distributor, to market Cronos' Peace Naturals medical cannabis products in Germany. Cronos also has joint ventures in Australia and Israel to sell medical marijuana.
The case for Emerald Health
Emerald Health's opportunities are similar to those of Cronos Group. The company hopes to capitalize on the legalization of recreational marijuana in Canada and explore international opportunities.
Like Cronos, Emerald Health knows that adding production capacity is necessary to ramp up its sales growth. Emerald Health has taken several steps to achieve this goal. The company forged a joint venture with produce grower Village Farms where a facility owned by Village Farms is being converted to grow cannabis. Cronos recently signed an agreement with the joint venture company to buy 40% of its production in 2018 and 2019, which should be between 21,000 and 24,000 kilograms each year.
Another big step for Emerald Health is its recent acquisition of Quebec-based Agro-Biotech. With this deal, Emerald Health picks up an additional 3,000 kilograms of production capacity this year. Agro-Biotech is expanding its indoor facility and should have full production capacity topping 10,000 kilograms per year by the end of 2018.
Emerald Health acquired majority ownership in Northern Vine in November 2017. There were a couple of key advantages for Emerald Health with this deal. Northern Vine is a Licensed Dealer in Canada, which gives it the right to export marijuana -- something Emerald Health can't legally do with its status as a Licensed Producer. The investment in Northern Vine also gives Emerald Health exposure in the cannabis analytical testing market.
Technology is another area where Emerald Health hopes to profit. The company is working with Namaste Technologies to develop an e-commerce platform for retail marketing of cannabis products. Emerald Health also is forming a joint venture to develop a supply chain management system and e-commerce marketplace for the cannabis industry based on blockchain technology.
Better marijuana stock
Cronos Group appears to be in better position to get a jump-start in the recreational marijuana market assuming legalization efforts are successful. The company also has an edge over Emerald Health in claiming a share of the international medical marijuana market.
If we only looked at bang for the buck, though, Emerald Health wins. Its market cap is less than half that of Cronos, but its production capacity at the end of 2018 will be over two-thirds the capacity of Cronos.
Which is the better marijuana stock? It's a tough call. My view, though, is that more consolidation is on the way in the Canadian marijuana industry. I think that Emerald Health would likely be the more attractive takeover candidate between these two companies. Therefore, the nod goes to Emerald Health over Cronos.
That being said, I'm not going on record as calling Emerald Health a stock for investors to buy right now. There are simply too many stocks on the market that I think are even better buys.
