The big Canadian marijuana stocks get a lot more press than HEXO Corp. (HEXO -3.81%) and Auxly Cannabis (CBWTF -12.08%). However, both HEXO and Auxly have intriguing stories.
So far in 2018, HEXO definitely has the more positive story for investors. The stock is up more than 70%, while Auxly Cannabis' share price has plunged close to 30%. But anyone who follows the cannabis industry knows that what goes up can come down, and vice versa.
Which of these two marijuana stocks is the better pick for investors now? Here's what you need to know about the reasons to consider buying HEXO and Auxly Cannabis.
The case for HEXO
HEXO's greatest immediate opportunity is the opening of the Canadian recreational marijuana market in October. While estimates vary, it's possible that this market could be worth around $5.4 billion by 2022. There are several reasons to be cautiously optimistic about HEXO's chances of grabbing a significant share of this market.
The company's current annual production capacity of 25,000 kilograms might not be overly impressive. However, HEXO is scrambling to dramatically increase its capacity. By the end of this year, the company expects to boost its production to 108,000 kilograms of cannabis per year.
HEXO already knows where a lot of this supply will go -- to its home province of Quebec. In April, the company announced a huge supply agreement with Quebec under which it will supply 25,000 kilograms for the province's recreational marijuana market in the first year of business. That figure reflects 35% of the projected market in Quebec. And the amount HEXO supplies will increase each year.
The company is also preparing for a major retail presence throughout Canada. HEXO made a strategic investment in cannabis retailer Fire & Flower in July. Fire & Flower is planning to open retail cannabis stores in several Canadian provinces.
And while Canada won't finalize regulations for edible cannabis products, including beverages, until next year, HEXO should be in great position in that market as well. Molson Coors Brewing teamed up with HEXO in August to launch a joint venture focused on developing cannabis-infused beverages.
HEXO hasn't tested the waters yet in international cannabis markets. However, the company has indicated that it hopes to establish a presence in Europe and Latin America next year.
The case for Auxly Cannabis
Auxly Cannabis in the past has sort of been a marijuana grower that wasn't a marijuana grower. It doesn't build its own marijuana production facilities. Instead, Auxly has a revenue streaming business model whereby it provides financing to other companies in exchange for a portion of their crop yields. However, Auxly has also fully acquired companies, so its business model has changed a bit.
Thanks to its multiple revenue streaming and acquisition deals, Auxly's funded annual production capacity totals more than 150,000 kilograms. The company believes this level puts it in fourth place for funded capacity among Canadian companies, ahead of Tilray, HEXO, and most other marijuana producers, while trailing behind only Aurora Cannabis, Canopy Growth, and Aphria.
However, Auxly isn't limited to the "upstream" part of the business of growing marijuana. The company has actively sought to diversify vertically into other areas of the cannabis industry.
Auxly owns 100% of DoseCann, a company that develops cannabis-based medical products and consumer products such as cannabis edibles and concentrates. These activities are categorized as "midstream" since they involve extraction, processing, manufacturing, and research. Auxly also acquired another midstream company, KGK Sciences, which provides contract research services to nutraceutical, natural health product, and consumer packaged goods companies, including cannabinoid research.
What about the "downstream" part of the cannabis industry -- distribution and retailing? Auxly has that box checked as well. The company acquired Kolab Project, which plans to launch a retail cannabis store in Saskatchewan. This acquisition also boosts Auxly's upstream business. Kolab recently completed construction of a second phase to its Ontario facility and has received a cannabis sales license from Health Canada.
Auxly doesn't have a huge international footprint at this point. However, the company owns 80% of Inverell S.A., a licensed cannabis operator in Uruguay. Inverell claims a large outdoor facility that grows hemp plants for cannabidiol (CBD) extraction.
Better marijuana stock
Auxly Cannabis and HEXO are very different kinds of companies operating in the same industry. HEXO's relationship with Molson Coors gives it a real advantage. However, based on bang for the buck -- how much capacity you can get per dollar -- Auxly is the better pick.
In my view, though, neither of these marijuana stocks is a great choice for investors. Both of them could generate good returns over the next couple of years if the Canadian recreational market takes off as many expect. But it's only a matter of time before there will be a supply glut in the country. When that happens, the survivors will be the companies that have established operations in international markets, especially Europe.
My concern for Auxly and HEXO is that the bigger players could leave them behind. Remember that "better" is a relative term. It doesn't always mean the best alternative. I think the best choice for investors is to look elsewhere.