3 Canadian Marijuana Stocks With Reasonable Valuations
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Most cannabis-based companies command pricey valuations, but these Canadian marijuana stocks are affordable
With federal restrictions on cannabis remaining in place in the U.S., investors look to Canadian marijuana stocks. By all accounts, these stocks continue to achieve outsized rates of growth. The industry should grow further after Oct. 17, when weed will become legal across Canada for any purpose.
The U.S. has also seen the legal environment improve. Oklahoma approved medical pot earlier this year. If medical marijuana can gain approval in that part of the U.S., it can easily become legal in all 50 states soon. However, the political climate in the U.S. has also limited efforts to legalize to just a few states. Also, federal restrictions have hampered the growth of U.S.-based firms in this industry.
Moreover, investors already see the future in cannabis. As such, most Canadian marijuana stocks have seen multiples rise. A recent investment by Constellation (NYSE:STZ) in Canopy Growth (NYSE:CGC) sent the entire sector higher. Also, rumors of Diageo (NYSE:DEO) wanting to follow suit have furthered the upward pressure.
Despite elevated stock prices, investors should still look at specific Canadian marijuana stocks. These three equities could profit investors, even in the current investment climate.
Canadian Marijuana Stocks to Consider: Aphria Inc (APHQF)
Aphria (OTCMKTS:APHQF) remains my favorite among the larger Canadian marijuana stocks. Named after the Celtic word for “agreeable,” the agreeability goes beyond its core product. Aphria has grown into the third largest producer in Canada. Only Canopy and Aurora (OTCMKTS:ACBFF) exceed Aphria in size.
Aphria’s focus centers around medical marijuana. The company has become a lead producer of products such as capsules and vaporizers. It has also ventured into the recreational market. Like Canopy, it has also partnered with an alcoholic beverage company. In May, it partnered with Southern Glazer’s Wine and Spirits for distribution rights.
Aphria has also become the largest profitable cannabis producer in Canada and it has remained so since 2016. Like most Canadian marijuana stocks, it trades at a relatively high multiple. Its price-to-earnings ratio currently stands at about 88. Such a P/E remains expensive by S&P 500 standards. However, market leader Canopy does not have a P/E at all and trades at over 121 times sales. In comparison, APHQF stock looks relatively inexpensive.
Growth also looks promising, at least over the long-term. Analysts do not expect to see profit growth for the upcoming fiscal year. However, for the next year, they predict profits will grow by 450% to 55-Canadian-cents-per-share (42 cents, USD). That would take the forward P/E for the next fiscal year to around 30.
Hence, against aggressive growth targets, the price of APHQF stock looks reasonable for this industry. Even if it misses that growth target, Aphria still appears to enjoy the best near-term financial conditions among the larger Canadian marijuana stocks. For those looking for a cannabis stock with a market cap above $2 billion, I prefer APHQF stock over its larger counterparts.
Canadian Marijuana Stocks to Consider: CannTrust Holdings (CNTTF)
CannTrust (OTCMKTS:CNTTF) stands out among Canadian marijuana stocks. Although they have begun to explore the recreational market, they have focused historically on medical-related products. It partners with Apotex, Inc., the largest generic drug producer in Canada. These pharma products, especially cannabis extracts and oils, tend to enjoy higher margins than other marijuana-related products.
It also stands out as one of the few to earn a profit. The company reported its first profitable quarter in March. Now, its current P/E ratio currently stands at about 58, coming in even lower than Aphria. Also, investors might find the P/E of 58 worthwhile due to forecasted profit growth. Analysts expect earnings to grow by 236.4% next year.
CNTTF stock should also benefit from a trend that will inevitably appear: consolidation. CannTrust maintains a market cap around $825 million, less than one-tenth the current market cap of Canopy. And many believe Canopy itself is the target of a takeover by Constellation. For this reason, I would not assume that CannTrust will see much of a future as an independent company.
Still, with its profits and its assets in some of the higher-margin areas, I believe CannTrust will become a buyout target. Also, given its earnings and low valuation (for its industry), investors should profit from CNTTF stock in the near-term.
Canadian Marijuana Stocks to Consider: OrganiGram Holdings, Inc. (OGRMF)
OrganiGram (OTCMKTS:OGRMF) also focuses mostly on medical pot. It designs its products to treat a variety of conditions such as post-traumatic stress disorder (PTSD), trauma therapy and chronic pain. OrganiGram also provides several strains of cannabis, which are both organic and mineral-grown.
Investors should take notice of the improving financials. Analysts predict the company will lose 1-Canadian-cent-per-share (0.76 cents, USD) this year. Better yet, expected revenue and sales growth should take OGRMF stock to profitability next year. If these forecasts hold, the company will earn 14-Canadian-cents-per-share (11 cents, USD) next year. This would take the forward P/E on next year’s earnings to 48.
With its market cap holding at around $630 million, it remains one of the smaller players in the market. However, I think it will begin to stand out among smaller Canadian marijuana stocks once it posts a profit.
Like CannTrust, I can also see OrganiGram becoming a buyout target. The fact that it will maintain a P/E ratio below the triple digits and hold a market cap under $1 billion will make it appealing to larger companies. Also, with it operating in the higher-margin drug market, medical marijuana demand should help the company remain profitable. Either way, its value and forecasted growth should hold OGRMF stock in good stead, whether it operates on its own or becomes part of a larger company.
As of this writing, Will Healy is long CNTTF stock. This article was originally published on September 5, 2018.
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