Last year, the marijuana industry broke down more than a dozen barriers. We witnessed an industrialized country legalize recreational pot, saw the U.S. Food and Drug Administration approve the very first cannabis-derived drug, and watched as numerous marijuana stocks uplisted from the over-the-counter exchange to either the New York Stock Exchange or Nasdaq.

But after a year of promises, 2019 and beyond will feature a new focus. With the industry blossoming under the umbrella of legalization through much of North America and Europe, it's now up to pot stocks to deliver the green. In other words, operating results actually matter now.

A handful of dried cannabis buds lying atop a messy pile of cash bills.

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Which pot growers have the lowest forward price-to-sales ratio?

Of course, most marijuana stocks are going to get a pass on profitability for perhaps a year or two as they ramp up growing and processing operations. However, revenue figures -- and, more specifically, future price-to-sales ratios -- will absolutely be coming into focus. Pot stocks with low forward price-to-sales ratios could turn out to be hidden gems, while those trading at high future sales multiples may be worth avoiding.

With this in mind, I set out to take a look at the forward price-to-sales ratios (i.e., current market cap relative to Wall Street's consensus 2020 sales estimate) of the 12 largest marijuana producers in Canada. Two -- Aleafia Health and Emerald Health Therapeutics -- were eliminated for insufficient coverage from Wall Street. That left 10 of the largest Canadian marijuana growers that I could rank based on relative cheapness to their 2020 sales figures. Here's what the data revealed:

  • Auxly Cannabis Group (NASDAQOTH:CBWTF): price-to-sales ratio of 1.93
  • Aphria (NYSE:APHA): 3.04
  • The Green Organic Dutchman: 3.24
  • CannTrust Holdings (NYSE:CTST): 4.50
  • OrganiGram Holdings (NASDAQ:OGI): 6.33
  • HEXO: 6.84
  • Tilray: 12.92
  • Aurora Cannabis: 14.92
  • Canopy Growth (NYSE:CGC): 29.16
  • Cronos Group (NASDAQ:CRON): 38.65
A person holding a large puzzle piece with a question mark drawn on it.

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The biggest "values" have some of the largest question marks

The first thing that probably stands out is that there are some insanely attractive values in the marijuana industry, based on 2020 sales forecasts and market cap. Unfortunately, the pot stocks that look to be the deepest discounts are potentially damaged goods.

For example, Aphria looks dirt cheap at three times next years' sales. This is a company that's expected to be the third-largest grower by peak annual production (255,000 kilos), and it has a presence in close to a dozen countries, including Canada. But Aphria is also trying to regain the trust of investors after a short-seller report in early December alleged that it had overpaid for its Latin American assets. Although an independent committee determined that Aphria had paid a reasonable amount for its Latin American assets, it nevertheless took a 50 million Canadian dollar impairment in its most recent quarter, once again raising questions about the trustworthiness of management.

Auxly Cannabis Group may not have the management questions that Aphria brings to the table, but it's far from a surefire investment. As a licensed producer and royalty company, Auxly has regularly had to issue stock to raise capital for its licensing ventures and acquisitions. This has meant ongoing dilution for long-term shareholders. Furthermore, a potentially lucrative joint venture between Auxly and FSD Pharma fell apart in early February, adding question marks to the company's peak retail capabilities.

A hand reaching for a neat stack of hundred dollar bills in a mouse trap.

Image source: Getty Images.

Larger, cash-rich pot stocks have quite the premium

At the other end of the spectrum, you'll note that the largest marijuana stocks (which also happen to be the most cash-rich) tend to be the priciest on a forward sales basis.

Canopy Growth is the envy of all marijuana stocks, with approximately $3.7 billion in cash and cash equivalents on its balance sheet as of the end of calendar year 2018. Most of this capital is the result of a $4 billion equity investment from Modelo and Corona beer maker Constellation Brands, which was completed in November. But despite being cash-rich, and holding a handful of competitive advantages, Canopy is possibly the most exposed pot stock to Canada's current supply chain issues, with close to 80% of its cannabis sales deriving from recreational marijuana consumers. It's also a company that won't be profitable on a recurring basis until 2021.

Similarly, Cronos Group is lugging around more than $1.8 billion in cash following the closure of a $1.8 billion equity investment from tobacco giant Altria in March. But Cronos Group's most recent quarter featured an abysmal $4.2 million in sales despite it being the first quarter of legalized recreational weed sales in Canada. Cronos is lagging its large peers on peak production and overseas presence, which makes its price-to-sales ratio of more than 38 all the scarier.

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Image source: Getty Images.

The middle is where you'll likely find the best value

Truth be told, the best "value," with regard to price-to-sales ratio and inherent risk, tends to be located around the midpoint of the above list.

Take CannTrust as a good example. CannTrust has been beaten up in recent months after announcing a CA$700 million shelf offering, which allowed it to recently raise $170 million (that's U.S.) in cash. The company's fourth-quarter earnings report also featured higher-than-expected costs. But this is also a producer that's cheaper on a peak production basis (200,000 kilos to 300,000 kilos a year) than pretty much all other growers. With production costs that are expected to be lower than the industry average, as well as a keen focus on high-margin oil production, CannTrust appears genuinely inexpensive at 4.5 times consensus 2020 sales.

Likewise OrganiGram Holdings looks like a bargain at a little more than six times 2020 sales. OrganiGram is focused on just a single facility: its Moncton campus in New Brunswick. But despite having just a single grow site, the company is maximizing its grow space, with an estimated 231 grams per square foot of yield (113,000 kilos at its peak over roughly 490,000 square feet of cultivation space). OrganiGram is also one of just three pot growers to have supply agreements in place with all of Canada's provinces.

In other words, valuing pot stocks based on their forward sales potential is a great place for investors to start their research, but it's by no means an end-all.