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Pot stocks have been on a tear this year as Canada passed nationwide legalization of recreational marijuana use, views on marijuana soften in the U.S. with more states passing medical marijuana measures, and as the international medical marijuana continues to expand.
While many cannabis stocks have shown tremendous growth—and delivered massive returns,—most come with crazy expensive valuations.
But these three Canadian cannabis stocks have comparatively reasonable valuations, and offer investors strong growth prospects in this fast-growing sector.
Here’s what you need to know about these three pot stocks.
Aphria (TSX: APH.TO, OTC: APHQF) is one of the top five Canadian growers in the medical marijuana space, and it stands to see a substantial boost from legalization going into effect in the country in October.
One thing that Aphria has above other growers is that it is a very low cost producer at less than CA$1 per gram. At such a low production cost, Aphria has set itself up for much better margins than most growers. Because of this, Aphria has been the largest profitable cannabis producer in Canada since 2016. It is also the only company among its peers to have posted 11 consecutive quarters of positive adjusted EBITDA.
The company is the third largest overall producer in Canada, and it has become the leading maker of products like capsules and vaporizers. Leading up to Canada’s legalization going into effect, Aphria has inked a deal with Southern Glazer’s Wine and Spirits—the largest wine and spirits distributor in North America—to be its exclusive Canadian distribution partner.
To keep up with the demand that will come with the legalization of recreational use, Aphria is expanding its production capacity, and expects to grow 255,000 kilograms annually starting next year.
But an even more promising prospect for Aphria is the global medical marijuana market. Aphria recently acquired Nuuvera, which sets the company up to better compete in the international market as Nuuvera has a presence in roughly a dozen international markets, including both Germany and Italy.
Aphria trades at a relatively high multiple with a price to earnings (P/E) ratio of 88, which is expensive relative to the broader market. However, when compared to a stock like Canopy Growth Corp (NYSE: CGC), which doesn’t even have a P/E and trades at over 121 times sales, Aphria looks more reasonably valued.
With its foothold in the medical marijuana field and its strong positioning going into the legalization of recreational marijuana in Canada next month, Aphria’s growth prospects look strong. Next year, profits are expected to grow by 450% to $0.42 per share, which would take its forward P/E ratio to around 30.
In its Q2 report, the company demonstrated that its current assets dwarf its long term debt by a 15:1 margin. Its revenue also rose by 99% year-over-year to $9 million from $4.5 million a year ago. And the year-to-date growth was even more impressive at 122% for the first half of 2018 at $16.9 million, compared to $7.6 million in the same timeframe last year.
The company also managed to achieve positive net income, reporting $11.5 million, and $0.12 in earnings per share.
CannTrust is well positioned to do well in Canada’s recreational marijuana market. It has close to 500,000 square feet of growing space between its two production facilities, and has begun construction at a third site. When this third site is ready, CannTrust will reach a total annual production capacity of more than 100,000 kilograms.
The company has also inked supply agreements for recreational marijuana with the British Columbia, Alberta, and Manitoba provinces, and it plans to market a line-up of three recreational cannabis brands, including dried flowers, pre-rolled joints, oils, and capsules. Its focus on ancillary products like oils and extracts comes with a substantial difference in margins, which means CannTrust can do more with every dollar in revenue it earns.
Like Aphria, CannTrust has its sights set on the international medical marijuana market. It already has a presence in Australia, and now has a presence in Denmark thanks to its joint venture with Stenocare. The company also plans to export medical marijuana to Brazil, Germany, and Mexico in the future.
At a forward P/E of just 24, its arguably the cheapest Canadian cannabis grower on the market.
What sets OrganiGram apart from other growers is the the company operates just one single production site, which will yield 113,000 kilograms when it reaches full capacity in April 2020. By operating just one grow site, OrganiGram is able to centralize its costs, which ultimately improves its margins.
Like CannTrust, OrganiGram has diversified beyond just dried cannabis. In its most recently reported quarter, the company reported that it sold 552,000 milliliters of cannabis oil, a 297% increase over the same quarter a year ago. While oils are more of a niche product, they come with a much higher margin than dried cannabis.
While OrganiGram could lose out on some supply deals since its expanded operations won’t be completed until 2020, its central location and focus on oils as well as dried cannabis will enable it to do more with each dollar of revenue than its peers over the long run.