In just eight days, Canada's Senate is set to vote on bill C-45, better known as the Cannabis Act. If approved in the Senate, a path could be cleared for the Cannabis Act to be signed into law shortly thereafter. If so, Canada would become the first developed country in the world to legalize adult-use marijuana.

For growers, this legalization means big money. The estimated market size of recreational cannabis in Canada is around $5 billion, which comes atop what the industry is already generating from medical cannabis sales and exports to foreign countries where medical marijuana is legal. Needless to say, growers have been expanding as quickly as their wallets will allow in an effort to secure as much market share as possible when the proverbial green flag waves.

A lit cannabis joint held in front of Canada's red maple leaf.

Image source: Getty Images.

In anticipation of the Cannabis Act's passage, investors have pushed most marijuana stocks into the stratosphere. For instance, kingpin growers like Canopy Growth Corp. and Aurora Cannabis, which are reinvesting nearly every ounce of operating cash flow back into capacity expansion, may not deliver much in the way of profits in 2019, and are currently valued at nosebleed forward price-to-earnings ratios. This is pretty much the case with most of the pot industry -- save for OrganiGram Holdings (NASDAQOTH:OGRMF).

What once was the only marijuana value stock ...

Back in March, I labeled OrganiGram as the only marijuana value stock. Today, its forward P/E of 27 is substantially lower than its peers, and it likely sports a price/earnings to growth (PEG) ratio of around 0.5 (there are no five-year growth estimates from Wall Street, so this is an educated guess on my part). Any PEG ratio below 1 is typically considered "cheap."

There are two factors, in particular, that help OrganiGram stand out from the crowd. For starters, its management team has decided to solely expand operations at its Moncton, New Brunswick, facility, rather than opening up a second facility elsewhere. By centralizing its growing operations, OrganiGram can keep its total costs down.

Vials of cannabis oil lined up on a counter.

Image source: Getty Images.

Secondly, and perhaps most important, OrganiGram has a keen focus on cannabis oil production. In its most recently reported quarter, OrganiGram sold 552,000 milliliters of oils, up 297% from the year-ago period. Though cannabis oil isn't for everyone, it has a significantly higher price point and beefier margins than traditional dried cannabis. Plus, even with more than two dozen countries having medical cannabis laws on their books, not all approve the use of dried cannabis. Cannabis oil, on the other hand, is almost universally accepted in these countries. It is expected to play a key role in boosting OrganiGram's margins, relative to its competitors. 

Added together, this grower with an estimated production capacity of 113,000 kilograms of cannabis by 2020 looked like one heck of a value in March, and may very well still be a good value. But it's no longer the only marijuana value stock.

... is no more!

Earlier this month, CannTrust Holdings (NASDAQOTH:CNTTF) reported its third straight quarterly profit, with the Ontario-based grower delivering a profit of CA$0.12 ($0.09) per share in the first quarter of fiscal 2018.

One of the big reasons why CannTrust has been so profitable is that, as with OrganiGram, its focus is on extracts and oils. Of the nearly $6.1 million in sales CannTrust registered in Q1 2018, more than half was the result of oil and extract sales. Since these are significantly higher-margin products, CannTrust has been able to do far more with each revenue dollar than most of its peers.

A vial of cannabis oil sitting next to a cannabis leaf.

Image source: Getty Images.

Along those same lines, CannTrust has benefited from innovation within its oil and extract line. In April, it announced a partnership with Grey Wolf Animal Health to examine the possible uses of cannabis-based products in treating pets. It also introduced cannabis oil vegan hard-shell capsules last month. This is a company working to differentiate itself by its oil and extract offerings -- and based on its latest quarterly results, it's working.

Like other growers, CannTrust is also in the midst of an extensive capacity expansion. When the Niagara Greenhouse facility expansion is complete, it should bring CannTrust's total capacity to around 1 million square feet. That may not seem like much next to Canopy Growth Corp., which is aiming for 5.7 million square feet in licensed capacity, but it's more than enough with so much of the company's production targeted at higher-margin oils and extracts. 

According to Wall Street's estimates, CannTrust is valued at just 24 times its 2019 profit estimates, and it likely has a PEG ratio that's even lower than OrganiGram. It appears to be just as much of a marijuana value stock as OrganiGram.

Even marijuana value stocks aren't immune to this concern

While these marijuana value stocks probably look quite appealing on paper, their dynamics can change due to one ongoing risk: dilution.

An investor using a magnifying glass over a balance sheet.

Image source: Getty Images.

For many marijuana companies, traditional avenues to raising capital simply aren't available. That's because banks don't want anything to do with a substance that's still considered to be illegal in all but one country in the world (Uruguay). This has left Canadian pot stocks with essentially one recourse to raise capital: bought-deal offerings.

A bought-deal offering is nothing more than a means to sell some combination of common stock, convertible debentures, stock options, and/or warrants to an investor or group of investors to raise cash. The good news is that OrganiGram and CannTrust have had no issue raising capital when they've needed it.

The downside is that all of these capital-raising ventures increase the number of shares outstanding. That's a recipe for dilution, as well as lower earnings per share, since there are a greater number of shares outstanding for net income to be divided into. In fact, following CannTrust's recent announcement of a bought-deal offering, Wall Street's 2019 consensus EPS has modestly fallen. 

In other words, though these companies appear to be value stocks at the moment, ongoing dilution has the potential to drive up their forward P/E ratios and make them less appealing on a fundamental basis. It's something prospective investors should keep in mind.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.