Canadian marijuana grower HEXO Corp. (HEXO), formerly known as Hydropothecary, has enjoyed a really good year so far in 2018. Its stock is up more than 60%. HEXO also landed a key deal with a big company outside of the cannabis industry.
But "really good" doesn't begin to describe the year for Tilray, Inc. (TLRY). The stock skyrocketed 850% since its initial public offering (IPO) in July before giving up some of those gains. Tilray is still up more than seven times its IPO price.
Which of these two marijuana stocks is the better buy now? Here are the strongest arguments for both Tilray and HEXO.
The case for Tilray
Let's first address the elephant in the room about Tilray: The stock is still ridiculously overpriced right now. That's not surprising after Tilray soared so much in such a short period of time. However, its long-term prospects appear to be very good.
Canada is set to open its recreational marijuana market in just a few weeks. Tilray already has supply agreements lined up with eight provinces and territories, including the biggest prize among the group: Ontario. The company also is in great shape to deliver on those agreements, with 912,000 square feet of growing space in operation by the end of 2018 -- 682,000 of it in Canada.
An even greater opportunity for Tilray, though, lies in international medical marijuana markets. The company recently became the first marijuana grower approved to supply both cannabis flower and cannabis oils in Germany. Tilray's Portugal facility gives it a good hub for distributing products to Europe.
Tilray is also serious about researching the use of medical cannabis in potentially treating various diseases. It has a partnership with Novartis' Sandoz subsidiary to develop and market co-branded medical cannabis products. Tilray recently announced that it had secured approval to supply cannabinoid capsules for a clinical study in the U.S. evaluating medical cannabis in treating essential tremor, a neurological disorder that causes involuntary shaking.
The company is also likely high on the list to be picked as a partner by a major beverage company. Two big alcohol beverage companies have already signed deals with Canadian marijuana growers. Other beverage companies are also reportedly seeking cannabis partners.
The case for HEXO
HEXO has some bragging rights in that it is one of the two marijuana growers with a big beverage partner. Molson Coors Brewing announced in August that it had selected HEXO as its partner to develop cannabis-infused beverages.
Teams like to have a home-field advantage, and HEXO definitely appears to have one in its home province of Quebec. Earlier this year, the company signed a big supply agreement with Quebec that should give it a 35% market share in the province's recreational marijuana market.
In addition to Quebec, HEXO has supply agreements in place with two other provinces, British Columbia and Ontario. The company invested in cannabis retailer Fire & Flower as part of its strategy to reach more customers in provinces that allow retail cannabis stores.
What about capacity? HEXO has it covered. The company projects that it will be able to produce 108,000 kilograms of cannabis per year by the end of 2018.
HEXO thinks that it will rank as one of the top two licensed producers in Canada in terms of market share, thanks in large part to its Quebec agreement. The company hopes to launch cannabis-infused beverages with Molson Coors next year. And although HEXO isn't operating in any international markets, the company's management has hinted at plans to expand into Europe and Latin America in the near future.
Better marijuana stock
If you absolutely had to buy a marijuana stock right now, I think HEXO would be the better pick. Why? Valuation. HEXO gives a better bang for the buck based on its market cap and production capacity.
However, over the long run, I think that Tilray will be the bigger winner. My reasoning is that the global marijuana market is really where the action will be -- and Tilray has a big head start over HEXO. I also fully expect that Tilray will partner with a major company outside of the cannabis industry in a tighter relationship than the one HEXO has with Molson Coors.
I am emphatically not advocating that anyone buy Tilray stock at its current price. But Tilray's valuation at some point will be in better alignment with its prospects. In the meantime, though, investors can pretty much bank on continued high volatility for Tilray.