This article was originally posted on October 10 and has since been updated.
Canada’s recreational market is officially open for business.
Such a seismic event is likely to send Canadian pot stocks soaring, even after months of exploding share prices.
But rather than placing bets on a hot marijuana stock like Tilray (NASDAQ: TLRY), which has been soaring since its recent IPO, smart investors should instead consider those companies in the space that are positioning themselves to profit on Canada’s $5 billion recreational market and beyond.
Here’s what you need to know about three such companies.
But its industry-leading production capacity isn’t the only thing to love about Aurora Cannabis.
First, Aurora’s focus on the medical marijuana market in Canada and internationally looks likely to be a smart move.
One issue with the opening of the recreational market is that dried marijuana will quickly become commoditized, which will wreak havoc on marijuana growers’ margins. Such a scenario is already playing out in Colorado, Washington, and Oregon where oversupply has crushed the price per gram.
But by focusing on the medical marijuana market, Aurora Cannabis is effectively narrowing its prospective customer base which both reduces the potential for commoditization and ensures the company’s pricing power. In the long term, that means better margins than a purely recreational grower which is very good news for shareholders.
The company is also focused on growing its international footprint in the medical cannabis arena through partnerships and acquisitions. One recent example is its deal with Alfred Pedersen & Son in Denmark, a partnership that will result in a newly retrofitted facility in Denmark that will produce 120,000 kilograms per year.
This brings us to the second thing to love about this stock: Aurora Cannabis’ acquisition strategy, and diverse investments are likely to set the company up for long term success, both in Canada and beyond.
Aurora Cannabis has grown through at least 14 acquisitions in the last two years as it seeks to become a major medical marijuana player both domestically and worldwide. The company has also invested around C$700 million in cannabis companies outside of its own business, and those investments are paying off big time giving Aurora Cannabis a fantastic means of diversifying its revenue stream beyond just dried cannabis.
Considering the company’s growing international footprint and massive production capacity, it’s no wonder why Coca Cola (NYSE: KO) is eyeing the company for a possible CBD-infused beverage collaboration. A deal with Coca Cola would be a massive headwind for Aurora Cannabis, and would likely send the stock soaring.
Another headwind: Aurora Cannabis is planning to list on a U.S. exchange on October 23. And between that and the opening of Canada’s recreational market, there’s no doubt this stock is heading higher.
Aphria (OTC: APHQF, TSX: APH.TO) is another big grower in Canada in the medical marijuana space, and is likely to see a massive boost from the opening of the country’s recreational market. And much like Aurora Cannabis, the rumor mill is reporting that the company is planning to list on the NYSE in the near term, which would be a big headwind for the stock.
One thing that I like about Aphria is that it is cheaper than its peers in the cannabis space in terms of relative valuation, especially when you consider its wholesale supply deals with Auxly Cannabis (TSXV: XLY.VN)—which will supply up to 100 kilograms per month while Aphria builds up its production capacity, and then will supply 20,000 kilograms annually thereafter—and Emblem (OTC: EMMBF, TSXV: EMC.VN), which will supply 175,000 kilograms over five years beginning in May of next year.
The company also boasts very low production costs at less than C$1 per gram. With such a low production cost, margins are far better than most growers and has made Aphria the largest profitable producer in Canada since 2016.
Another bright spot for Aphria is that, ahead of Canada’s recreational market’s official opening, it has inked supply agreements with all 10 Canadian provinces and the Yukon, for 11 total provincial supply agreements. These deals cover 99.8% of all Canadians, and will provide for around 22,250 kilograms per year, excluding Alberta where the annualized total remains undecided.
Given all this, it’s not hard to understand why analysts’ average price target for the stock is C$26.83, or possible upside of 37.96% over the next twelve months.
CannaRoyalty (OTC: CNNRF)
Ottawa-based CannaRoyalty (OTC: CNNRF) isn’t your average Canadian marijuana stock.
CannaRoyalty began its business by focusing on royalty-streaming deals where it would give funds to marijuana businesses in exchange for a share of future revenue, a percentage of products produced, or an equity stake, much like a mining royalty company.
Some of these deals really paid off, and two of them involved the sale of preroll technology developed by Wagner Dimas as well as the sale of Anandia Labs to Aurora Cannabis.
But while the company still makes some of these royalty deals, the company has recently shifted its focus to California where the company is now the largest distributor in the state.
That’s particularly interesting because while “Canada is big. California is huge.” according to the company. California also represents the largest legal marijuana market in the U.S., and the world.
So while the opening of Canada’s recreational market marks a monumental moment for the industry, CannaRoyalty is really a bet on the California market and the broader U.S. market, which the company is very well positioned to profit on as the largest distributor in the largest market in the country.