Canada now stands as the first major economic power to legalize the use of recreational marijuana. On Tuesday, the Canadian Senate overwhelmingly passed bill C-45, also known as the Cannabis Act. Although it will take provinces and territories another eight to 12 weeks to prepare, a sizable new cannabis market will soon open in the country.
Most Canadian marijuana stocks moved higher after the legislative milestone, but which stocks are the best picks for investors looking to profit from the anticipated marijuana market boom? Here's why Canopy Growth Corporation (CGC -1.01%), Aphria (NASDAQOTH: APHQF), and Aurora Cannabis (ACB -2.79%) look like top marijuana stocks to buy after Canada's historic vote.
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1. Canopy Growth Corporation
Capitalizing on the coming recreational marijuana market requires two key ingredients: plenty of production capacity and a strong retail presence. Canopy Growth has both.
Canopy currently operates facilities with over 2.4 million square feet of growing space. However, the company is expanding its operations to include more than 5 million square feet of growing space by next year. Based on some back-of-the-envelope calculations, Canopy Growth should be able to produce more than 780,000 kilograms of cannabis each year at its projected full capacity.
There are 10 provinces in Canada and three territories. Canopy Growth already has supply agreements for recreational marijuana with three of them and has announced retail sites in Saskatchewan and Newfoundland and Labrador.
Although Canopy Growth claims the highest market cap of any marijuana stock, it actually ranks as one of the best bargains in terms of cost per kilogram of production capacity. In addition, the company's partnership with large alcoholic-beverage maker Constellation Brands gives it access to resources that other marijuana companies don't have.
2. Aphria
Aphria appears to be in good shape to compete in the recreational market, as well. Although the company currently can grow only around 35,000 kilograms of cannabis per year, Aphria is on target to have an annual production capacity of 255,000 kilograms by early 2019.
The company also has solidified its retail strategy by forging a key distribution partnership. In May, Aphria selected Southern Glazer as its exclusive distribution partner for recreational marijuana. Southern Glazer is the largest wine and spirits distributor in North America and has operations in all of Canada's provinces.
Another plus for Aphria is its low cost structure. The company already is able to produce cannabis at less than 1 Canadian dollar per gram. Aphria CEO Vic Neufield has predicted that the ability to operate at low costs could be tremendously important by late 2019 as supply catches up with demand in the Canadian recreational marijuana market.
3. Aurora Cannabis
Aurora Cannabis has been more aggressive than any other marijuana grower in Canada at rapidly expanding capacity through acquisitions. The company has bought CanniMed Therapeutics and MedReleaf -- the third-largest Canadian marijuana grower -- over the last few months.
Although some have criticized Aurora's acquisition strategy, the company's Chief Corporate Officer Cam Battley recently defended the approach of rapidly scooping up other players. Battley stated that Aurora was in the middle of a "land grab" to establish integrated operations as quickly as it could to compete more effectively.
Thanks in large part to the MedReleaf deal, Aurora will be on course to fund annual production capacity of more than 570,000 kilograms. The company also has secured agreements with smaller marijuana growers to lock in additional capacity.
Aurora's efforts to prepare for the retail marijuana market include partnering with and buying a stake in Alcanna, which operates 229 liquor stores in Alberta. The company also has signed distribution agreements with leading Canadian pharmacy chains Pharmasave and Shoppers Drug Mart.
But aren't these stocks too expensive?
Canopy Growth's market cap stands at nearly $7 billion. Aphria and Aurora Cannabis claim market caps of around $2 billion and $4.3 billion, respectively. Are these marijuana stocks simply too expensive to buy? Not necessarily.
The Canadian annual recreational marijuana market is likely to be in the ballpark of CA$7 billion. Adding the potential for the medical marijuana market in the country brings the total market size to more than CA$8 billion. That's not enough to justify the market caps of these top marijuana stocks -- but the global opportunity is.
Currently, 22 countries other than Canada have active medical marijuana laws. Global demand for medical marijuana could create a market as much as eight times greater than the Canadian cannabis market. And that's not including the possibility that other countries legalize medical marijuana or that the U.S. could change federal laws to allow states to legalize medical or recreational marijuana without fear of interference.
Granted, it could take longer than expected for these global markets to develop. Even top marijuana stocks could suffer if the delays are too long. Over the long run, though, I think that Canopy Growth, Aphria, and Aurora Cannabis should prosper from the loosening of restrictions on marijuana use.
