Chances are that you'd struggle to find a faster-growing industry right now than legal marijuana. With global sales expected to grow by 38% in 2019, and more than double between 2018 and 2022, the cannabis industry has all the makings of a once-in-a-generation investment opportunity.
Then again, choosing what stocks to sink your money into in a nascent industry is never easy. In many instances, the most popular stock in a fast-growing industry isn't the one that winds up being the best long-term investment.
Marijuana stock Aurora Cannabis has gained quite the following
Among millennials, there's no marijuana stock more popular than Aurora Cannabis (ACB -3.55%). Aurora does have a lot of factors working in its favor, including industry-leading run-rate production. The company was already producing at a yearly run rate of 150,000 kilos at the end of March, and looks to be on track for at least 625,000 kilos per year by the midpoint of 2020. With the exception of Canopy Growth, there isn't another grower with even half the annual production potential of Aurora Cannabis.
To build on this point, Aurora also gets the nod for being relatively efficient with the cannabis it is growing. A recently announced expansion at its flagship Aurora Sun campus in Medicine Hat, Alberta, to 1.62 million square feet will see a minimum of 230,000 kilos produced each year. That's better than 140 grams per square foot, or 40% higher than the industry average of closer to 100 grams per square foot of dried flower yield.
The company is no slouch on the international front, either. Having production or distribution operations in 24 countries places Aurora at the top of the list in terms of geographic diversification. This overseas presence could come in particularly handy if and when dried flower oversupply and commoditization becomes a problem in Canada a few years down the road.
Forget Aurora Cannabis: There are better pot stocks to consider buying
But it's also a company that's heavily reliant on inorganic growth, and it finances these acquisitions by issuing its common stock like Monopoly money. As a result, Aurora's market cap keeps growing, but shareholders are left twiddling their thumbs as the share price goes nowhere fast. Making matters worse, Aurora is unlikely to be profitable in fiscal 2019 or fiscal 2020, on an operating basis.
If you want in on the marijuana craze, there are three growers that offer a much more attractive value proposition than Aurora Cannabis.
To begin with, OrganiGram Holdings (OGI -0.25%) brings more intrigue to the table, even after hitting an all-time high last week, than Aurora Cannabis.
Based in New Brunswick, OrganiGram is the only major grower in an Eastern Canadian province (by "major," I'm talking about more than 100,000 kilos a year projected at its peak). As such, the company should have geographic advantages over pretty much every other grower in Eastern Canada. While New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador aren't exactly highly populated provinces, early data shows that cannabis use rates in these provinces are considerably higher than the national average.
OrganiGram is also one of the few growers that can blow Aurora out of the water when it comes to production efficiency. At the company's lone campus in Moncton, New Brunswick, OrganiGram expects to produce 113,000 kilos across roughly 490,000 square feet of cultivation space. That's better than 230 grams per square foot, or more than double the industry average. By utilizing three growing tiers, the company is able to maximize what growing space it will have, once all grow rooms are complete by the end of the year.
Another area where OrganiGram one-ups Aurora is the fact that it's one of just four marijuana stocks to have supply deals in place with every Canadian province.
Add this all up, and it's easy to see why Wall Street expects OrganiGram to be one of the most profitable growers on a per-share basis in 2020. Valued at less than 32 times forward earnings, but with superior crop yield and a renewed focus on derivative production (which may soon include cannabis-infused beverages), OrganiGram looks to be a much more attractive stock than Aurora.
Feel free to take note of my bias as a shareholder, but CannTrust Holdings (CNTTQ) is another grower that appears to offer more from a value perspective than Aurora Cannabis.
CannTrust's flagship grow campus is Niagara, which will eventually span 840,000 square feet and use high-tech grow methods, including moving containerized benches in its already completed phase 2 expansion, spanning 450,000 square feet. The Niagara campus, as well as the 60,000-square-foot Vaughan facility, both use hydroponic growing methods (growing plants in a nutrient-rich water solvent, as opposed to soil), which can produce very low-cost cannabis if there's access to cheap electricity and water, which is the case with Niagara. All told, these two grow farms should yield 100,000 kilos of run-rate output by the midpoint of 2020.
CannTrust also recently announced its intention to acquire up to 200 acres for outdoor growing purposes. This outdoor grow is expected to add 100,000 kilos to 200,000 kilos of run rate per year, making CannTrust a top-five producer -- and maybe even a top three. But aggregate output isn't as important as what the company plans to do with its outdoor grow. Most of this added production will head for extraction, yielding resins and distillates that it can use in high-margin edibles, beverages, topicals, and multiple other derivatives that will be legal by mid-October 2019, at the latest.
The company also expects to return to profitability by 2020, once its major capacity expansion projects are complete. Investors would struggle to find a marijuana grower with a more attractive peak production potential relative to market cap than CannTrust.
Quebec-based HEXO (HEXO -12.82%) could probably run circles around Aurora Cannabis over the long run.
Unlike OrganiGram, HEXO is on the opposite end of the spectrum, with a production yield that's actually lower than the industry average: 150,000 kilos spanning closer to 1.79 million square feet of cultivation space. Thankfully, HEXO has so much going on from various deals that certain inefficiencies like this can be minimized.
For example, HEXO secured the largest supply deal in history with its home province of Quebec in 2018. The deal spans five years, with an option for a sixth, and covers at least 200,000 kilos of cannabis. Mind you, this deal was locked in back when HEXO was expecting 108,000 kilos of peak production a year from its flagship Gatineau campus. Even with the added output of its $197 million Newstrike Brands acquisition, roughly 30% of its output through 2023 is already spoken for.
HEXO also managed to turn heads when Molson Coors Brewing decided to form a joint venture with the company this past August. The 57.5%/42.5% venture known as Truss (Molson has the majority stake) will aim to create nonalcoholic cannabis-infused beverages, which as noted are expected to hit dispensary stores within the next five months.
The company also has its own extraction facility, and recently signed a two-year deal with Valens GroWorks for significant third-party extraction services. This signals HEXO's commitment to diversify its product line into high-margin derivatives. In other words, HEXO should be more profitable than Aurora on a per-share basis.