Considering how poorly marijuana stocks have performed since the end of the first quarter of 2019, you might find what I'm about to say hard to believe. But the fact is, cannabis could well be one of the fastest-growing industries in North America this decade.
However, we've witnessed one heck of a divide in North America between the U.S. and Canadian marijuana markets. Though Canada was the first industrialized country in the modern era to greenlight recreational cannabis, it completely fumbled its efforts to become the global blueprint for legalization.
Canada blew its chance to be a global marijuana leader
Some of this blame falls on national and provincial regulators. National agency Health Canada delayed the launch of high-margin derivatives (e.g., vapes, edibles, topicals, concentrates, and infused beverages) by two months. The agency also took a long time to review and approve cultivation, processing, and sales licenses before the official legalization of adult-use sales on Oct. 17, 2019.
At the provincial level, problems have ranged from supply shortages to complete bottlenecks. For example, Ontario, Canada's most populous province, used a lottery system to assign dispensary licenses until the end of 2019. Canadian sales commenced on Oct. 17, 2019; a year later, only 24 retail locations are open. For context, Ontario could comfortably house around 1,000 dispensaries.
But it's not all the fault of regulators. Canadian marijuana licensed producers have had plenty of miscues of their own. Up and down the line, we've witnessed LPs grossly overpay for the acquisitions they made between 2016 and 2019, with far too many bumping up capacity to levels that simply didn't make sense given projected demand in domestic markets.
While it's obviously going to take time for Canada to work through its issues, there's bound to be at least one winner among its more than half-dozen highly visible LPs. The big question is: Which Canadian pot stock has the best chance of long-term success?
These LPs aren't in great shape
Despite being the two most cash-rich cannabis stocks in North America, neither Canopy Growth (CGC -0.52%) nor Cronos Group (CRON 0.52%) is guaranteed success. Canopy Growth is losing money hand over fist and has shuttered at least 3 million square feet of licensed indoor greenhouses in 2020. Meanwhile, Cronos Group's big bet on derivatives hasn't yet paid off. Cronos might not have enough capacity at its disposal.
I'm fairly confident it's not going to be Aurora Cannabis (ACB -0.20%), either. Aurora has been a slow-motion train wreck since March 2019. It wrote down about $3 billion Canadian in fiscal 2020 and has been slashing expenses to reduce its cash burn and avoid breaching its debt covenant. The company's push toward adjusted positive earnings before interest, taxes, depreciation, and amortization (EBITDA) has also been kicked down the road repeatedly.
As for Tilray (TLRY) and HEXO (HEXO 4.00%), it's not even certain that these two will survive to see the long term. Both Tilray and HEXO have undertaken at-the-market share offerings to raise cash because they keep losing boatloads of money. They also each grossly overpaid for key acquisitions, with Tilray writing down a substantial sum tied to its Manitoba Harvest purchase and HEXO taking a huge impairment from its Newstrike Brands buyout.
This Canadian marijuana stock is best-positioned for the long term
The fact is, there's only one Canadian marijuana stock that seems to have a good chance at long-term success: OrganiGram Holdings (OGI -1.92%).
OrganiGram isn't much to look at right now. Just like its peers, it's struggling, with net sales falling 27% from the prior-year period in the fiscal third quarter despite the coronavirus pushing licensed Canadian cannabis store sales to an all-time high. The most recent quarter also saw cost of sales more than triple. An adverse fair-value adjustment on biological assets also widened the company's net loss.
But there are other factors that make OrganiGram the most logical choice to succeed.
For one, it's the only major LP to focus its attention on a single facility. At the height of capacity expansion, Aurora Cannabis had 15 facilities, while Canopy Growth reached the double digits. Meanwhile, OrganiGram has its Moncton facility in New Brunswick -- and that's it. Having a single facility capable of producing 70,000 kilos of cannabis annually affords the company far more flexibility on the cost and output front than its peers. In other words, it's easier to solve one puzzle than 15 puzzles at the same time.
OrganiGram's Moncton facility should also be one of the most efficient in the industry once the Canadian weed industry has worked out its kinks. That's because OrganiGram is focusing on high-level tetrahydrocannabinol plants with three growing tiers in its greenhouse. Maximizing yield and grow space should enable the company to significantly reduce its growing costs.
The company's location could also be a competitive advantage. OrganiGram is the only major LP located in an Eastern Canadian province. Although provinces like Ontario and Quebec are far more populated, surveys have shown higher cannabis usage rates in the Eastern Canadian provinces.
Lastly, OrganiGram might have a clear path to derivative growth once Canadian regulators resolve the country's supply problems. The company has spent CA$15 million on a line of fully automated equipment to produce up to 4 million kilos of infused chocolates annually. It also has a powdered beverage that can speed up how quickly cannabinoids take effect.
Having avoided overpriced acquisitions and resisted the urge to expand capacity, OrganiGram is in great shape to thrive over the long run.