Go big or go home?
There's a case to be made that's the best perspective when it comes to investing in Canadian marijuana stocks. And there's no bigger Canadian marijuana stock right now than Canopy Growth Corporation (NYSE:CGC).
On the other hand, some investors could argue that there are some advantages to smaller stocks with a solid niche -- not the least of which is the potential for being acquired by a larger player. The Hydropothecary Corporation (NYSEMKT:HEXO), for example, is a licensed producer (LP) in the Canadian cannabis market with a market cap only one-eighth the size of Canopy Growth.
Which of these two marijuana stocks is the better pick for investors? Here's how Canopy Growth and Hydropothecary stack up against each other.
The case for Canopy Growth
Canopy Growth is already a major force in the Canadian medical marijuana market. All eyes are now on the opportunities for selling marijuana for recreational use throughout the country later in 2018. Canopy Growth expects to leverage its current leadership position to become the top retail cannabis distributor in the near future.
Estimates vary as to how big the marijuana market in Canada will be after the legalization of recreational cannabis. However, it's almost certainly going to top 5 billion Canadian dollars annually and could realistically be much larger than that. In the not-too-distant future, Canopy could generate yearly revenue measured in billions of dollars rather than millions.
The company should be in a strong position to supply retail cannabis. Canopy operates eight facilities with over 2.4 million square feet of production capacity. Its expansion projects are expected to more than double its annual production capacity.
Canopy Growth also is already a key player in the global medical marijuana market, which has the potential to be much larger than the total Canadian market. The company bought MedCann in 2016, a move that gives Canopy a solid base for growth in Germany as well as in other European nations.
With its recent acquisition of Daddy Cann Lesotho, Canopy Growth now has operations on five continents. This deal positions the company to target the medical marijuana market in South Africa when regulations are finalized. Canopy is also active in Australia, Brazil, Chile, Denmark, Jamaica, and Spain.
Thanks to the company's partnership with Constellation Brands, Canopy could also win in another market. Constellation bought a 9.9% stake in Canopy last year. The two companies are working together to develop cannabis-infused alcohol products.
The case for Hydropothecary
The Hydropothecary Corporation is a big fish in one small pond. The company is currently the top supplier of medical cannabis in the Canadian province of Quebec with a market share of 35%. Hydropothecary also signed the biggest forward-supply contract in the history of the Canadian cannabis industry with a five-year deal with Quebec.
Hydropothecary's current annual production capacity of 3,600 kilograms is only a drop in the bucket compared to Canopy Growth's capacity. However, Hydropothecary is rapidly expanding its capacity. By August of this year, the company expects to have an annual production capacity of 25,000 kiiograms. Its capacity should increase to 108,000 kilograms per year by March 2019.
Another plus for Hydropothecary is its relatively low cost of production. Just a year ago, the company's weighted average cost of dried cannabis sold was CA$1.73 per gram. Now, though, Hydropothecary's average cost is only CA$0.97 per gram.
The company has several factors working in its favor to hold down production costs. One is its low electricity rates. Another key advantage is its new equipment that helps improve crop yields.
If larger marijuana growers look to make additional acquisitions, it's possible that Hydropothecary could be on the short list of candidates. The company's foothold in Quebec and increasing capacity could make it a top buyout target.
Which is the better pick for investors? My vote would be Canopy Growth.
The bottom line in my view is that size matters in the global cannabis industry. Canopy's international operations give it a big advantage over most other marijuana growers. The company's relationship with Constellation Brands is also a major positive. While Canopy faces some risks -- especially the potential for unfavorable supply demand imbalances -- I continue to think it ranks as one of the best marijuana stocks on the market.