When Canada launched recreational marijuana sales a little over a year ago, hopes (and valuations for pot stocks) were incredibly high. Canada was the first industrialized country in the modern era to give adult-use weed the green light, and numerous U.S. states have been pushing toward medical or recreational legalization. With Wall Street calling for between $50 billion and $200 billion in worldwide annual sales by 2030, it looked as if investors couldn't lose.

But lose they have.

A dried cannabis bud and a small vial of cannabinoid-rich liquid next to a Canadian flag.

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Investors continue to pile into these three popular cannabis stocks

Since the end of March, the Horizons Marijuana Life Sciences ETF, first cannabis-focused exchange-traded fund, has lost about 55% of its value, while most popular pot stocks have shed well over half of their value. This has some investors wondering if marijuana stocks might be a solid bargain at these levels.

In particular, no marijuana stocks seem to be more popular, or more held among millennial investors, than Aurora Cannabis (NASDAQ:ACB), Canopy Growth (NASDAQ:CGC), and Cronos Group (NASDAQ:CRON). According to online investing app Robinhood, which caters to millennials, Aurora, Cronos, and Canopy are the respective first, ninth, and 10th most held stocks on the platform. 

What makes these three Canadian pot stocks so popular is their combination of branding, partnerships, output, and/or cash. Canopy Growth and Cronos Group, for instance, both landed major equity investments over the past 13 months. Constellation Brands dropped $4 billion into Canopy for a 37% stake, with tobacco giant Altria Group handing over $1.8 billion to Cronos for a 45% stake in the company. Even though these cash balances have shrunk as Canopy and Cronos put some of their capital to work, they're still in a far more enviable position than pretty much every other pot stock.

Meanwhile, Aurora Cannabis has the economy-of-scale edge. If it were to fully develop all 15 of its cultivation facilities, it would be producing more marijuana per year than any of its peers -- and it's not even close.

A one hundred dollar bill burning from the center outward.

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No, Aurora, Canopy, and Cronos aren't worth buying

Yet all three of these exceptionally popular pot stocks is highly flawed and worth avoiding in the interim.

  • Canopy Growth is losing money at an extraordinary rate and recently reported fiscal second-quarter operating results where shared-based compensation by itself was higher than the company's net cannabis sales.
  • Cronos Group has been generating very little in sales, it's way behind its peers from a production perspective, and the company continues to lose money on an operating basis, if fair-value adjustments and derivative liability revaluations are removed from the equation.
  • Aurora Cannabis' expectations for profitability have been pushed further down the line, with the company now idling about half of its peak production capacity and lugging around approximately $2.4 billion in goodwill. This accounts for 57% of the company's total assets and looks to be portending a future writedown.

Not to mention, these three Canadian juggernauts are facing supply issues in their domestic market that are unlikely to ebb anytime soon. Health Canada has struggled to get through a backlog of licensing applications that began the year north of 800. We've also seen a handful of provinces slow-step the rollout of physical dispensaries. Ontario, which is home to almost 2 out of 5 Canadians, had just two dozen open dispensaries on the one-year anniversary of the launch of adult-use cannabis sales.

To be clear, these supply issues are fixable. However, it's going to take multiple quarters before we begin to see Aurora, Canopy, or Cronos making notable progress on their income statements.

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This is the one Canadian pot stock you should buy

Despite these problems in Canada, the entire industry isn't necessarily worth avoiding. Instead of focusing your attention on Aurora, Canopy, and Cronos, which are among the worst possible investment choices, the one Canadian marijuana stock investors can buy is OrganiGram Holdings (NASDAQ:OGI).

OrganiGram is unique in a number of ways. First, it's the only major grower -- i.e., a grower expected to produce more than 100,000 kilos per year, when at peak capacity -- to be located in an Atlantic province, New Brunswick. This is noteworthy because surveys have shown that cannabis-use rates have been higher in these Eastern provinces, even though the population of these provinces is lower than, say, British Columbia or Ontario. Presumably, this gives OrganiGram an opportunity to really shine in these close-to-home provinces.

However, to build on this point, OrganiGram is one of just four marijuana growers that has a supply deal in place with every Canadian province (and one of these four is CannTrust, which is currently barred from growing or selling weed). This puts the company in great shape when it comes to supplying pot products throughout the country.

Next, it's important to note that OrganiGram is only dealing with a single grow site at Moncton, New Brunswick. Whereas Aurora Cannabis could struggle to reduce its expenses with 15 different grow sites around the world, OrganiGram can more easily adjust aspects of its growing, processing, and supply chain to rein in expenses.

A gloved processor using scissors to trim a cannabis flower.

Image source: Getty Images.

OrganiGram also has the edge when it comes to growing efficiency. According to management, if the company were operating at full capacity, it should be producing 113,000 kilos per year on a run-rate basis. Given the company's cultivation space and its three-tiered growing system, this works out to around 230 grams per square foot. There's only one other grower that looks to have a chance to be more efficient in terms of yield per square foot.

The company has also made smart investments in high-margin derivative products. A $15 million Canadian investment in a fully automated line of equipment will allow OrganiGram to produce up to 4 million kilos of infused chocolates per year. Furthermore, the company developed a proprietary nano-emulsification product that can be added to beverages to speed-up the process by which cannabinoids take effect. This product, which'll first be introduced as a powder, will hit the market next year.

Lastly, OrganiGram is the only Canadian pot grower that's been able to generate a no-nonsense operating profit. In other words, if you remove cost of goods sold and recurring operating expenses from net sales, OrganiGram was left with positive operating income. No other Canadian pot stock can make this claim, which is what makes OrganiGram the Canadian cannabis stock to buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.