Marijuana stocks were sizzling hot last year. So far in 2018, though, most marijuana stocks have performed horribly. Two of the biggest losers so far are Aphria (NASDAQOTH:APHQF) and Supreme Cannabis (NASDAQOTH:SPRWF). The share prices of both Canadian marijuana growers have dropped like a brick this year.
Which of these two stocks is most likely to rebound? Here's how Aphria and Supreme Cannabis stack up against each other.
The case for Aphria
I think there are three primary arguments for buying Aphria stock. First, the company has a tremendous opportunity with the legalization of recreational marijuana in Canada. Second, Aphria has even better prospects with the expanding global medical marijuana market. And third, there's still a chance that the company could become a major player in the biggest marijuana market of all -- the U.S. Let's look at each of these arguments in detail.
The nationwide market for adult use of recreational marijuana opens in Canada in October. Aphria should be in a good position to claim a nice chunk of that market. The company has signed retail cannabis supply agreements with five provinces so far -- Alberta, British Columbia, Manitoba, New Brunswick, and Quebec. Aphria also lined up Great North Distributors, a subsidiary of large wine and spirits distributor Southern Glazer's, as its exclusive retail cannabis distributor in Canada.
Global medical marijuana sales could be much larger than total cannabis sales in Canada over the long run, though. Aphria's acquisitions, joint ventures, and partnerships have enabled the company to get its foot in the door in marijuana markets across the world. The biggest of these opportunities is in Germany, where Aphria's subsidiary, Nuuvera Deutschland operates. Aphria also has a presence in other countries, including Argentina, Australia, Brazil, Colombia, Italy, Jamaica, Lesotho, and Malta.
The size of the U.S. marijuana market could reach $22 billion by 2022. Aphria had to divest its U.S. operations, though, to remain in compliance with listing requirements of the Toronto Stock Exchange. But the company hasn't abandoned hope of expanding to the south. For example, Aphria negotiated an option with the buyers of its stake in Liberty Health Sciences to repurchase its position in the company if U.S. federal marijuana laws change.
In the meantime, Aphria is cranking up its production capacity to meet the anticipated increase in demand. The company is on track to be able to produce 225,000 kilograms of cannabis annually by early 2019.
The case for Supreme Cannabis
Supreme Cannabis' opportunities are similar to those of Aphria. The company is already preparing for the Canadian recreational marijuana market. Supreme has signed retail cannabis supply agreements with three provinces so far -- Alberta, British Columbia, and Manitoba.
What about the global medical marijuana opportunity? Supreme Cannabis has been active on that front as well. In March, the company bought a stake in Medigrow Lesotho and formed a global cannabis oil distribution partnership with the Lesotho-based marijuana grower. This deal puts Supreme Cannabis in a good position to enter the market in neighboring South Africa if and when the country finalizes the legalization of medical marijuana.
Unlike Aphria, Supreme Cannabis hasn't made any moves to clear the way for entry into the U.S. market. That could certainly change, though, if federal marijuana laws in the U.S. are revised to allow marijuana industries in states that have legalized marijuana to operate without fear of interference.
Right now, Supreme Cannabis' production capacity isn't very large. The company's 7ACRES facility can only produce around 5,000 kilograms per year. However, that capacity will be much greater by the end of this year. Supreme is on track to complete an expansion effort by then that should boost its annual production capacity to at least 50,000 kilograms.
If you've been keeping score, Aphria has more agreements with Canadian provinces for supplying retail cannabis than Supreme Cannabis does. Aphria has a footprint in more global medical marijuana markets than Supreme does. Aphria would be able to move more quickly into the U.S. market if federal laws change. And Aphria has a greater production capacity than Supreme Cannabis has. In my view, all of these factors help make Aphria the better marijuana stock.
I think that Aphria is well-positioned to succeed in the domestic Canadian market and the global marijuana market. My hunch is that the stock could bounce back nicely if the company's sales skyrocket as I expect they will once Canada's recreational marijuana market opens.
However, investors should keep in mind one big risk for Aphria: A supply glut will hit Canada sooner or later. When that happens, Aphria's fortunes will depend on how much global medical marijuana markets expand. There is considerable uncertainty on just how fast those markets will grow, though. Aphria stock probably has room to run, but it could also have a big hurdle to jump in the next few years.