You can't get away from Tilray (TLRY +0.00%). The Canadian marijuana stock makes news when it goes up, which has happened a whole lot over the last couple of months. And it makes news when it goes down. Tilray has done a good bit of that, too, over the past few days, at one point losing over half of its market cap.
But despite all the hype about Tilray, it's not the best marijuana stock on the market. One that has flown under the radar this year could quietly generate tremendous returns over the next few years. Forget Tilray -- here's why you'll probably like Liberty Health Sciences (LHSIF +0.00%) a lot more.
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About Liberty Health Sciences
First of all, Liberty Health Sciences has a couple of things in common with Tilray. Both companies are based in Canada; Liberty's headquarters are in Toronto. Both Liberty and Tilray also grow marijuana for medical use.
While Liberty Health Sciences is a Canadian company, its core operations are in Florida. The company recently began production at its Gainesville, Florida, cannabis facility. This new facility combined with Liberty's existing Chestnut Hill facility gives the company 41,200 square feet of growing space.
The company's capacity will increase significantly very soon, though. Liberty has another retrofitting project underway that should boost its total growing space to around 225,000 square feet by early next year. When completed, Liberty Health Sciences will rank as the No. 1 medical marijuana producer in Florida in terms of production capacity.
Liberty already operates four dispensaries in Florida along with six delivery hubs. The company anticipates opening seven additional dispensaries throughout the state by February 2019. The state of Florida allows licensed producers to operate up to 30 dispensaries.
But Liberty doesn't make its customers come to it; the company also takes its products to its customers. Liberty offers home delivery within 24 hours to medical cannabis patients throughout the state of Florida.
The company has had a close relationship with Aphria (NASDAQOTH: APHQF). In fact, Aphria owned a big stake in Liberty Health Sciences until it ran into trouble with the Toronto Stock Exchange. The TSX doesn't allow marijuana growers with stocks listed on its exchange to maintain significant operations in the U.S., where marijuana remains illegal at the federal level.
Aphria ended up divesting its ownership in Liberty. However, Aphria has a lock-up agreement in place that allows it to buy its shares of Liberty back within an 18-month period beginning in July 2018 if U.S. federal laws change. In the meantime, Aphria CEO Vic Neufeld continues to serve as chairman of Liberty Health Sciences' board of directors. Another Aphria executive, John Cervini, also is a member of Liberty's board.
Why the stock is attractive
Currently, only medical marijuana is legal in Florida. However, Arcview Market Research and BDS Analytics both project that it will be the No. 3 marijuana market in the U.S. by 2022, behind only California and Colorado. Medical cannabis sales in Florida are expected to be in the ballpark of $1.7 billion to $1.8 billion within the next four years.
Liberty Health Sciences CEO George Scorsis estimates that his company claims roughly 15% of the medical marijuana market in Florida today. But with Liberty's increased production capacity, the opening of new dispensaries, and success with its home delivery program, Scorsis predicts the company's market share will realistically increase to 25% in the not-too-distant future.
If Liberty can capture 25% of Florida's medical cannabis market and sales increase to $1.8 billion annually, the company should be able to rake in $450 million in sales within a few years. Liberty's current market cap is $350 million. The stock could easily trade at a multiple five times higher than it is now.
What if Liberty can't increase its market share beyond 15%? Growth in Florida's market should still enable the company to generate annual sales of around $270 million. That level would still warrant Liberty's stock trading much higher than it does currently.
And remember, we're still only talking about the medical marijuana market in Florida. Scorsis has stated that Liberty plans to expand into additional states with strong medical cannabis markets within the next six months, potentially including Massachusetts, New Jersey, Ohio, and Pennsylvania. Massachusetts has also legalized recreational marijuana; Liberty hasn't ruled out moving into that market as well.
Give me Liberty?
Let's go back to Tilray for a second. Its market cap stands at close to $12 billion. The total global marijuana market outside of the U.S. (where Tilray can't operate for now) is only projected to be $8.6 billion by 2022. Even if Tilray captures 100% of that market -- and it obviously won't -- the stock would still be overvalued.
Meanwhile, Liberty Health Sciences is sitting pretty in the third-biggest marijuana market in the U.S., with plans to move into other lucrative states. And its market cap doesn't come close to reflecting the company's growth potential.
It's true that the U.S. federal government could clamp down on companies like Liberty. However, it hasn't happened yet. You can bet there would be a huge backlash from the 30 states that have legalized marijuana if there was a crackdown. But it's still a risk that investors should keep in mind.
Cautious investors probably will want to steer clear of Liberty Health Sciences, and any other marijuana stock. However, aggressive investors should find a lot to like about Liberty.
