Most marijuana stocks have performed poorly so far in 2018. And a few have fared pretty well. Auxly Cannabis Group (NASDAQOTH: CBWTF), previously known as Cannabis Wheaton, is in the former category, with its share price sinking more than 35% year to date. Organigram Holdings (NASDAQOTH: OGRMF) is in the latter group, with its stock jumping nearly 25% as of early July.
But what goes up can go down -- and vice versa. Which of these two marijuana stocks is the better pick now? Here's how Auxly and Organigram compare.
Image source: Getty Images.
The case for Auxly Cannabis
There are two primary arguments for buying Auxly Cannabis stock. One is the company's growth potential. The other is the stock's valuation. Let's look at both in more detail.
Like most Canadian marijuana growers, Auxly Cannabis should be able to grow sales tremendously once Canada's adult-use recreational marijuana market opens in October. This market is projected to be at least 4.2 billion Canadian dollars and perhaps much larger.
Auxly, though, isn't like most Canadian marijuana growers. The company puts up money for other marijuana growers in exchange for royalties and a share of their crops. This royalty and streaming model has worked well in the silver and gold markets. Auxly thinks it's a great fit for the cannabis market as well, and the company expects to generate solid returns from this business model.
Auxly stands to win in a couple of ways. It will make royalties from its customers as they sell increasingly more cannabis -- which should happen once the floodgates open for recreational adult use. Auxly also will be able to sell the percentage of their production that it owns.
What about the stock valuation? Admittedly, Auxly Cannabis' share price isn't cheap by most valuation metrics. After all, the company's market cap is over $490 million with trailing-12-month sales of only $1.5 million. However, Auxly expects to have annual production capacity in the ballpark of 230,000 kilograms through its streaming deals. In terms of price per kilogram of capacity, Auxly is relatively inexpensive compared to most Canadian marijuana stocks.
The case for Organigram Holdings
Organigram makes its money the old-fashioned way, assuming you can call anything about the marijuana industry old-fashioned: The company grows marijuana and sells it. Currently, those sales are for medical cannabis to patients in Canada. That will change come October, though.
As of July 5, Organigram has agreements with four Canadian provinces to supply recreational cannabis for adult use. The company most recently inked a deal with the Alberta Gaming, Liquor & Cannabis Commission. Organigram had previously signed supply agreements with New Brunswick, Prince Edward Island, and Manitoba.
The company is also looking beyond its home country. Organigram partnered with Alpha-Cannabis Germany, including buying a minority stake in the business. This deal could give Organigram a foothold to enter the lucrative German medical cannabis market. The company has also partnered with CannaTrek to supply medical cannabis in Australia.
Capacity shouldn't be a major problem for Organigram. The company is on track to produce 81,000 kilograms annually by July of next year. Organigram expects to have an annual production capacity of 113,000 kilograms by April 2020.
My colleague Sean Williams likes to call Organigram a "marijuana value stock" because of its relatively low price-to-earnings-to-growth (PEG) ratio. If the company can deliver on the expected revenue growth, Organigram is arguably one of the best Canadian marijuana stocks on the market.
Both of these marijuana stocks have some pretty good arguments in their favor. If I had to choose only one, though, I'd go with Organigram.
I like that the company has already locked in recreational marijuana supply agreements with several provinces. I also like that Organigram has moved forward with relationships that position it in the global medical cannabis market.
Having said that, however, I do have concerns about the long-term prospects for smaller Canadian marijuana growers. It seems pretty clear that supply will catch up with and surpass demand in the country's recreational market within the next couple of years. When that happens, smaller players could be hit harder than larger companies, especially if they don't already have well-established international operations.
Still, Organigram should fare better than Auxly would if this scenario unfolds. But it's a risk that investors should keep in mind before buying any marijuana stock.
More From The Motley Fool
- The Best Marijuana Stocks to Buy in 2018
- Marijuana Stocks Are Overhyped: 10 Better Buys for You Now
- Your 2018 Guide to Investing in Marijuana Stocks