HEXO (HEXO) and Village Farms (VFF 1.20%) rank as two of the best-performing Canadian marijuana stocks of the year so far. Shares of Village Farms have soared higher than HEXO stock has, but HEXO's market cap remains nearly twice the size of Village Farms.
Historical stock performance and market caps aren't very important when it comes to identifying which of these stocks could generate greater returns over the long run, though. Which of these two marijuana stocks is the better pick? Here's how HEXO and Village Farms compare.
The case for HEXO
There are three main reasons why investors should consider buying HEXO stock:
- Its dominant market share in Quebec.
- Its joint venture with Molson Coors Brewing (TAP -0.27%).
- Its relatively attractive valuation.
Make no mistake -- Quebec is an important market for adult-use recreational cannabis. And thanks to its huge long-term supply agreement with the province signed last year, HEXO is in the driver's seat in Quebec. The company's market share stands north of 30% and should stay at least at that level for several more years.
HEXO also landed a major partner last year when it was selected by beer giant Molson Coors to form a joint venture to develop and market cannabis-infused beverages in Canada. That joint venture, named Truss, is gearing up to launch new products later this year when the market for cannabis edibles and other derivative products opens up in Canada. HEXO's relationship with Molson Coors arguably could put the company in a top position in this new market.
Bank of America analyst Christopher Carey likes HEXO better than any other marijuana stock on the market right now. His top consideration is HEXO's valuation. Although the company's market cap looks steep based on historical sales, HEXO almost appears to be a bargain compared to several of its peers when you look at its production capacity.
These three reasons aren't the only positives for HEXO, though. With its acquisition of Newstrike Brands, HEXO has supply agreements in place with eight Canadian provinces. And while HEXO hasn't been a major player so far internationally, its partnership with Greek cannabis company Qannabos gives HEXO a launching pad for European medical cannabis markets.
The case for Village Farms
What are the three top reasons for considering Village Farms stock? I'd say they are:
- Its rapidly growing production capacity.
- Its potential in the U.S. hemp market.
- Its valuation, which is arguably as attractive as HEXO's.
Until a couple of years ago, Village Farms wasn't a player on the Canadian cannabis scene. The company focused instead on growing greenhouse produce like cucumbers, peppers, and tomatoes. But Village Farms' joint venture with Emerald Health Therapeutics changed things.
That joint venture, Pure Sunfarms, is now on track to achieve an annualized production run rate of 75,000 kilograms of cannabis by mid-2019. Pure Sunfarms also plans to build another facility that will double its capacity by 2021.
While Pure Sunfarms works to make its mark in the Canadian adult-use recreational marijuana market, Village Farms is also looking to profit from the legalization of hemp in the U.S. The company established another joint venture to focus on the U.S. hemp-derived cannabidiol (CBD) market. Its initial plans include outdoor cultivation of hemp on more than 800 acres in Virginia, North Carolina, and South Carolina.
Village Farms also hopes to expand into Texas if hemp production is approved in the state. The company intends to use its Texas greenhouse operations, which have 5.7 million square feet of growing space, to cultivate hemp for CBD extraction.
If you base valuation on the price paid for production capacity, Village Farms appears to be as attractively valued as HEXO. Village Farms' production capacity and market cap are both around half that of HEXO.
Better marijuana stock
I think that HEXO is the better pick over Village Farms. While Village Farms has the raw ingredients for success in the cannabis market, HEXO is further along in building the infrastructure and partnerships required for success.
But although I like HEXO better than Village Farms, it's not a stock that I'd urge anyone to go buy right now. My view is that there are even better stocks to buy -- and even better marijuana stocks to buy.