The North American Marijuana Index, which tracks the leading cannabis stocks in the U.S. and Canada, is right about where it was to start the year despite surging over the past few months of 2017. The same could be said for one of Canada's larger growers. Aphria (OTC:APHQF) stock has risen in recent weeks, but it's still a bit below a peak it achieved in January. 

A somewhat smaller competitor with a U.S. stock listing, Cronos Group (NASDAQ:CRON), has outperformed Aphria and most of its peers with an impressive 60% gain in 2018. Can Cronos keep it up, or would investors do better with Aphria? Let's see how they compare to find out.

Marijuana and money.

Image source: Getty Images.

The case for Aphria

The big reason for Aphria's stock decline this year was one that threatens its entire industry: stock dilution. In January, the company acquired Nuuvera for around $670 million to bolster its international presence, and the number of outstanding Aphria shares climbed about 28% so far this year as a partial result.

The somewhat controversial Nuuvera acquisition makes Aphria an international company, with a strong presence in the burgeoning German and Israeli markets. Cannabis extracts generally carry higher profit margins than simple dried flower, and they're generally more popular among patients in Nuuvera's territory.

During the three months ended in May, Aphria recorded an overall EBITDA loss of CA$2.8 million that wouldn't have been a loss at all if employees hadn't received CA$6.0 million in share-based compensation. The Nuuvera acquisition had better work out, because fiscal fourth-quarter EBITDA from the company's Canadian operations fell to CA$2.2 million, from CA$2.5 million a year ago.

Although there were some bright points during the company's latest earnings report, Aphria disappointed investors who were expecting EBITDA growth, considering the company began booking revenue during the period from Broken Coast, which it recently acquired for CA$217 million.

Investors can look forward to the Oct. 17 initiation of recreational marijuana sales across Canada that are expected to top $5 billion at their peak. Aphria boasts an enviable CA$0.95-per-gram cash cost to produce dried cannabis, which means it has a better chance of surviving the oncoming Canadian supply glut than most of its peers by earning a profit from the products it sells on the international market. With global cannabis sales expected to grow from $8.3 billion last year to $28 billion in 2024, the company could get a chance to justify its recent market cap of $3.1 billion.

Dollar sign shadow on pot leaves.

Image source: Getty Images.

The case for Cronos Group

Cronos Group is another international player with a smaller $2.2 billion market cap at recent prices. Cronos Group's cost to produce dried cannabis per gram isn't as low as Aphria's, but it did fall 25% from the first quarter of 2018 to a respectable CA$1.62 per gram during the second quarter.

Cronos Group reported second-quarter revenue of $3.4 million, a stunning 428% increase from the previous-year period. Despite selling just 477 kilograms of cannabis products during the three months ended June, and spending heaps to prepare for Oct. 17, operations squeaked out a $490,000 profit during the period.

Of course, Cronos will have to increase its bottom line many times over if it's going to remain a company that investors think deserves a 10-figure valuation. Luckily, a leading global provider of cannabis oil recently agreed to purchase 20,000 kilograms of cannabis annually from Cronos as soon as it receives production sales licenses from Health Canada. This deal with Cura Cannabis Solutions won't justify the company's valuation on its own, but it is big step in the right direction.

The hands of two people, exchanging cash for a bag of marijuana.

Image source: Getty Images.

Why pay more?

If you're thinking about buying one of these stocks in expectations of huge recreational sales right off the bat, you should know that Canada's medical-marijuana program has been a disaster. Around 20% of Canadians smoke pot at least once a year, and nearly anyone can get a license to buy medical marijuana legally by complaining to their doctor about insomnia, depression, or anxiety. Despite becoming the world's second country with a government-run cannabis program in 2001, just 130,000 of Canada's 7.2 million pot smokers had bothered to get a doctor's prescription to purchase legal weed by the end of 2017. 

Unlike alcohol, first-time cannabis users who start as grown adults are highly unlikely to become regular customers. That means most of tomorrow's consumers are already buying illicit marijuana. If so few are concerned about the legal ramifications of getting caught without a license now, how many will be willing to pay extra for legal recreational marijuana after Oct. 17? 

The better marijuana stock

Investors expecting Canada's recreational marijuana market to deliver $5 billion in annual revenue ought to prepare for some disappointment. That's why the better marijuana stock is the one best positioned to avoid losing money following next year's Canadian supply glut. Right now, a lower production cost and a much larger overall footprint make Aphria look like the better option, although investors would be better off watching from a safe distance.