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Better Marijuana Stock: MedMen vs. Auxly Cannabis

Keith Speights, The Motley Fool

Many marijuana stocks have sizzled so far in 2019. The list doesn't include MedMen Enterprises (NASDAQOTH: MMNFF) and Auxly Cannabis (NASDAQOTH: CBWTF), though. MedMen's share price is up only 3% year to date while Auxly is down 12% so far.

Despite their weak performances in 2019, both MedMen and Auxly could have significant growth opportunities. But which of these two marijuana stocks is the better pick for long-term investors? Here's how MedMen and Auxly Cannabis stack up against each other.

Hands holding $100 bills and a marijuana leaf.

Image source: Getty Images.

The case for MedMen

MedMen's lackluster stock performance has resulted in part from controversies in which the company has been embroiled, including a lawsuit filed by its former CFO and questions about its promotional efforts. Neither of these controversies really impact MedMen's long-term prospects, though.

The company ranks as the biggest cannabis retailer in the U.S. MedMen is especially strong in California, with its stores routinely beating well-known retailers in revenue per square foot. But while California claims the biggest legal marijuana market in the world, the state got off to a rocky start last year with the launch of its recreational pot market. If California cuts some of its red tape that is limiting the cannabis industry and lowers its too-high tax rates as some legislators are proposing, it could pave the way for MedMen's sales to soar.

Probably the biggest near-term catalyst for MedMen is its pending acquisition of PharmaCann. It's the biggest acquisition in the history of the U.S. cannabis industry. Once the deal is finalized, MedMen will operate in 12 states with licenses for 66 retail locations and 13 production facilities. Those 12 states are home to more than half of the U.S. population.

But there are currently a total of 33 states where medical marijuana is legal, 10 of which also have legalized recreational marijuana. These numbers are almost certainly going to increase, with big states including Illinois and New York considering legalizing recreational pot. All of these markets present solid growth opportunities for MedMen.

Analysts think that MedMen could be headed for a big rebound. It's one of a handful of marijuana stocks that analysts project will double in price within the next 12 months.

The case for Auxly Cannabis

Auxly Cannabis made a dubious top 10 list in 2018: It was one of the 10 worst-performing marijuana stocks of the year. But while Auxly's share price plunged more than 50%, its market cap actually increased by 48%. This surprising gap stemmed from the company issuing so many new shares that it greatly diluted the value of existing shares.

It's possible, though, that the reasons behind Auxly's dilution could translate to substantial growth in the future. The company issued new shares to raise capital to fund its dealmaking. Auxly provides capital to some marijuana businesses in exchange for royalty streams. In other cases, the company directly invests in marijuana businesses, sometimes buying them outright.

As a result of its streaming deals, Auxly expects to have an annual production capacity of close to 50,000 kilograms this year. Within the next three years, the company thinks that its capacity will jump to 170,000 kilograms.

Auxly's wheeling and dealing isn't limited to marijuana growers. The company has partners or subsidiaries in several segments of the cannabis supply chain including midstream extraction and processing as well as downstream distribution and sales operations.

All of these relationships provide the kind of diversification that most marijuana stocks don't have. And with a market cap around $350 million, Auxly still has a valuation that isn't at a sky-high level considering its growth potential.

Better marijuana stock

My view is that Auxly Cannabis gets the nod over MedMen. I think its investments will slowly begin to pay off. As they do, Auxly stock should make a comeback.

However, I'm really not enthralled with either Auxly or MedMen. Both companies remain unprofitable and could continue to issue new shares to raise cash, resulting in more dilution. While I think that Auxly should outperform MedMen over the long run, I also think that there are better marijuana stocks for investors to buy.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Auxly Cannabis Group. The Motley Fool has a disclosure policy.