The Best Marijuana Stocks: Deep Industry & Company Analysis

Spreadsheet & table updated weekly
Published December 21st, 2018 by Jonathan Weber

The marijuana industry is growing rapidly.  Legalization in more countries and U.S. states means the industry is likely to continue growing at a rapid clip for some time.

As tech bubble investors remember, rapid industry growth alone does not guarantee investing success.  Choosing the best (or least risky) stocks in a growing industry can make a world of difference for returns.

This article takes a deep dive into the marijuana industry in search of the best marijuana stocks today.  Surprisingly, there are over 100 to choose from with full or partial exposure to the marijuana industry.

Click the link below to download our free Excel spreadsheet of more than 100 marijuana stocks.

 

Table of Contents

• List of Marijuana Stocks in A Sortable Table
• Industry Overview
• Investing In The Marijuana Industry
• ‘Pure Play’ Marijuana Stocks
• Indirect Exposure Marijuana Stocks
• The Best Marijuana Stocks
• Final Thoughts

List of Marijuana Stocks In A Sortable Table

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Industry Overview

The cannabis plant can be divided into 2 broad categories based on tetrahydrocannabinol [THC] content:

• High THC – what we often refer to as marijuana
• Nearly no THC – what we often refer to as hemp

Marijuana has recreational and pharmaceutical uses while hemp has primarily industrial uses.

Interestingly, THC is one of more than 480 known substances in the plant, with more than 60 of those being cannabinoids.

Marijuana can be used either by smoking, by vaporizing, as content in food or beverages, or as an extract.

Marijuana Use & Legality Around The Globe

In the recent past, marijuana laws around the globe have been relaxed in many cases, an increasing number of countries (and US states) have legalized the medical, and in some cases, the recreational use of marijuana. The drug has so far not been legalized on the federal level in the US, though.  The image below shows legalization by country.

Source: Cannabisbusinesstimes.com

Marijuana has been partially or fully legalized in 21 countries. In most cases, medical marijuana has been legalized while the recreational use of marijuana has not been legalized.

In Canada, marijuana has been fully legalized on the federal level in 2018. Several other countries, such as Germany and Mexico, have decriminalized the use and possession of small amounts of marijuana.

In a significant amount of US states marijuana has been at least partially legalized:

Source: governing.com

10 states (Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington), as well as the District of Columbia, allow the recreational use of marijuana by adults (with age restrictions ranging from 18 to 21).

In those countries (and US states) where marijuana has not been legalized, marijuana is still used regularly. It is the most commonly used illegal drug in both the world, as well as in the United States (where a 2016 study found that 51% of Americans had used the drug at least once). Globally, between 130 million and 230 million people use marijuana for recreational purposes every year.

Medical Use Of Marijuana

Medical marijuana, also called medical cannabis, refers to marijuana that has been prescribed by doctors to their patients as a form of treatment for a variety of symptoms. Evidence suggests that the consumption of marijuana (or marijuana-based products) can have positive impacts on patients with certain conditions that are not explained by the placebo effect.

The use cases for medical marijuana include:

• The treatment of nausea and vomiting for patients undergoing chemotherapy
• Increasing appetite for patients with an HIV/AIDS infection
• The treatment of chronic pain (e.g. caused by peripheral neuropathy) and muscle spasms
• The treatment of neurological issues, such as multiple sclerosis (MS), epilepsy, and movement problems.
• Sleep improvement
• the reduction of tics for patients with Tourette syndrome
• the treatment of post-traumatic stress disorder

In those countries where medical marijuana has been legalized, it oftentimes has only been allowed for a couple of years. The medical marijuana market thus is still in a relatively early phase of growth.

Growth catalysts include:

1. Rising usage in countries that have legalized
2. More countries legalizing

Studies suggest that the global medical marijuana market could be worth as much as $55 billion by 2024. The report from Global Market Insights sees an annual market growth rate in excess of 30%, driven by increasing use for the treatment of issues caused by cancer and HIV/AIDS primarily.

As doctors to increasingly prescribe medical marijuana instead of opioid narcotics (which can cause addiction and serious side effects) is seen as another long-term growth driver for the use of medical marijuana as a form of pain relief.

The most important geographic markets will be those where healthcare budgets are meaningful and where marijuana has been (partially) legalized. This includes the United States (states where the use of medical marijuana has been legalized), Canada, Israel, Australia, parts of Europe (Germany, Italy, France, The Netherlands), and parts of South America (Chile, Argentina).

Recreational Use Of Marijuana

Marijuana, the world’s most commonly used illegal drug, has a potentially very wide (and growing) legal recreational market.

So far the recreational marijuana market is concentrated on Canada and a couple of US states, though.

Tilray’s (TLRY) CEO has made statements that the global marijuana market could be worth $150 billion in annual sales right now, but this estimate includes a large portion of illicit marijuana trade, which obviously is not up for grabs by publicly traded marijuana companies.

Projections by Canadian Imperial Bank of Commerce (CIBC) see a country-wide (Canada) recreational marijuana market of $6.5 billion in 2020. Based on the fact that Canadians spent $5.6 billion on marijuana in 2017, when the drug was still illegal, this projection does not seem overly optimistic. It is likely that some Canadians will start using the drug now that it has been legalized, or that users who consumed illicit marijuana will increase their consumption now that the drug can be purchased at dispensaries legally.

Even though marijuana has not been legalized in the United States on a federal level, the US will still turn into a major market for recreational marijuana. In the 10 states where marijuana has been legalized (a number that will likely grow over the coming years), recreational marijuana sales outpaced medical marijuana sales.

Forbes forecasts that medical marijuana will make up just 35% of global legal marijuana sales by 2022 (down from 100% in 2013). If that market share holds constant in the following years, and if the projections for a medical marijuana market of $55 billion hold true, that puts the total legal marijuana market at $157 billion during the mid-2020s. This is roughly in line with estimates by Grand View Research, which puts the total global legal marijuana market (recreational and medical) at $146 billion by 2025. When we assume that these forecasts are more or less correct, that implies a global recreational marijuana market size of roughly $90-$100 billion in about seven years.

This would put recreational marijuana at roughly 13% of the global beer market, which is projected to be worth $685 billion by 2025. The global tobacco market, for reverence, is worth about $700 billion annually, with a low-single-digit growth rate.

When one looks at the projections for both the medical and recreational marijuana markets, one should account for the fact that these markets are significantly smaller today.

Analysts are projecting very high growth rates. If those do not materialize, due to legalization changes or shifts in consumer behavior, or because these projections were too optimistic in the first place, these market size estimates could turn out to be way too optimistic, thus investors should take these projections with a grain of salt.

Investors should also keep the following statement by Benjamin Graham in mind:

“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”

Market growth rates do not necessarily go hand in hand with high profits for the corporations that are active in this respective market, and they especially do not go hand in hand with meaningful shareholder payouts.

Growth stocks that are priced for perfection can disappoint investors and produce underwhelming total returns, even if the original thesis about strong underlying growth rates for the industry holds correct.

There are some credible arguments that can be made against high-profit margins in the marijuana industry. This includes the fact that market entry barriers are not overly high (there are no substantial network effects, entry costs are not overly large, and there are no big technological advantages), as well as the fact that marijuana is an agricultural good.

Margins in the agricultural industry are notoriously low, half of all agricultural businesses generate operating profit margins (before interest expenses and before taxes) of less than 5%. It is in no way guaranteed that the same will apply to the marijuana market, but it is possible that industry-wide profits in the marijuana industry could be relatively meager, despite a large market size.

Investing In The Marijuana Industry

There is a large number of publicly traded marijuana companies, with the biggest ones being located in Canada, the largest market where marijuana has been fully legalized. Companies in this segment have different strategies, such as focusing on the medical marijuana market or focusing on certain geographic markets.

There are several ETFs which investors can choose from if they are bullish on the industry as a whole and if they do not want to choose among single companies. The largest one of these ETFs is the Horizons Marijuana Life Sciences Index ETF (HMLSF), which has a current net asset value of $15.20 per share (CAD, equal to US$11.90):

Source: horizonsetf.com

This ETF made a quarterly distribution of $0.196 (CAD, equal to US$0.15) this fall, its forward yield is 5.1% (assuming distributions are neither cut nor increased). The Horizons Marijuana Life Science ETF has a relatively high expense ratio of 0.75% annually.

‘Pure Play’ Marijuana Stocks

Investors who are interested in this space can choose from a large list of publicly traded companies with direct exposure to the marijuana market, i.e. marijuana pure plays. These are companies which derive all of, or a vast majority of, their revenues from the sale of marijuana and marijuana products, for medical use and/or for recreational use.

The largest players in this segment are Canada-based, but US-based companies with meaningful market capitalizations exist as well. Outside of North America, there are no large players in this space, since other countries where (medical) marijuana has been legalized import marijuana from North American companies in most cases.

Most marijuana companies do not have a long history of revenues or earnings because the legal marijuana industry is still in its infancy.

It seems likely that those marijuana companies with the highest sales base and the largest production capacity have the highest chance of generating above-average margins. Reasons for this include economics of scale, operating leverage, and the fact that those with the most experience are likely the best at bringing down costs of production.

On the other hand investors should be careful not to overpay for stocks – which is why the price for a stock should always be looked at relative to metrics such as the earnings or the cash flows that the company generates (on a per-share basis).

As most marijuana companies are not profitable yet, the price to sales ratio can be a good metric to evaluate stocks in this segment. As sales of recreational marijuana are just starting (marijuana was legalized in Canada in October of 2018), the forward price to sales multiple is likely more meaningful than price to sales metrics for 2017 or the trailing twelve month period.

For most marijuana companies there are no sales estimates for 2019 and beyond, which means that we have to derive our own estimates. This is possible due to the fact that these companies publish their production capacity and capacity expansion plans.

We thus looked at the largest producers by production capacity and ranked them based on market value relative to their respective production capacity, which should be a good proxy for a price to sales ratio, assuming that the average price per gram is relatively similar across these companies.

This is the list of the 10 largest marijuana companies by production capacity:

• Aurora Cannabis (ACB)
• Canopy Growth (CGC)
• Aphria (APHQF)
• Tilray (TLRY)
• The Green Organic Dutchman (TGODF)
• Cronos (CRON)
• Organigram (OGRMF)
• HEXO Corp. (HYYDF)
• CannTrust Holdings (CNTTF)
• Emerald Health Therapeutics (EMHTF)

Of these, the five with the most promising price per production capacity ratio are analyzed below.

Marijuana Pure Play Stock: Emerald Health Therapeutics

Emerald Health Therapeutics is one of the smaller marijuana companies in this list, both by production capacity and by market capitalization. The ratio of these two metrics looks very favorable here, though.

Source: emeraldhealth.ca

The company is one of Canada’s licensed producers, which has been expanding its production capacity through several deals over the last couple of quarters. A 50/50 joint venture with Village Farms that owns a 1.1 million square feet facility has expanded Emerald Health’s future production capacity substantially. And, the company also acquired Agro-Biotech in 2018.

Together with existing production capacity these deals should allow Emerald Health to produce 100,000 kg of marijuana annually in the foreseeable future. Emerald Health trades at only $262 million right now, which means that investors have to pay just $2,620 per kg of production capacity, the lowest ratio among the top 10 producers.

Emerald Health is not the largest among the Canadian producers, which could be a bit of a headwind as it might lack scale once the industry has matured, but on the other hand this means that Emerald Health is a possible acquisition target in case some of the larger players with more cash on hand want to expand their production capacity further.

Marijuana Pure Play Stock: The Green Organic Dutchman

The Green Organic Dutchman is an Ontario, Canada, based marijuana company that was IPO’d in spring 2018 and is currently valued at $537 million.

Source: tgod.ca

The Green Organic Dutchman expects that its production capacity will be 170,000 kg of marijuana a year, based on several deals that have expanded the company’s asset base during 2018. This includes the June 2018 acquisition of a facility (280,000 square foot) that The Green Organic Dutchman plans to use for producing marijuana-containing edible products and marijuana-infused beverages.

The Green Organic Dutchman is currently valued at a price of $3,160 per kg of production capacity, the second lowest valuation of the major players in this industry.

Marijuana Pure Play Stock: Organigram

Organigram is a Moncton, Canada, based marijuana company that is currently valued at $460 million. The company has recently updated investors about its results in fiscal 2018, and on the company’s outlook for fiscal 2019:

Source: organigram.ca

The company plans to hit a production capacity of 113,000 kg of marijuana during the coming year, which means that Organigram is being valued at $4,070 per kg of production capacity right now, which makes Organigram one of the cheaper marijuana stocks.

Organigram has made a lot of progress in bringing down its production costs, those declined from $2.65 per gram in Q1 2018 to $0.83 per gram in Q4 2018. This massive success in reducing its costs bodes well for Organigram’s margin profile and its potential for generating profits in the future.

Marijuana Pure Play Stock: CannTrust Holdings

CannTrust Holdings has , like most of its peers, not been around for a long time; the company was founded just 3 years ago. CannTrust Holdings is based in Vaughan, Canada, and currently trades with a market capitalization of $552 million.

Source: canntrust.ca

The company expects that its production capacity will be 100,000 kg or more once its Niagara facility has come on line. CannTrust has begun construction of additional growing facilities, including a 600,000 square feet facility on unused land next to an already existing asset (Perpetual Harvest Facility), although it will take some time for this facility to begin production.

When we use the low end of management’s production guidance, CannTrust trades at a price of $5,520 per kg of production capacity, which still makes CannTrust one of the cheaper stocks in this space.

Marijuana Pure Play Stock: Aphria

Aphria is substantially larger than the peers in this list. The company is currently valued at $1.46 billion. The company is one of the global players in the marijuana industry, as it does not only operate in North America, but also in several other countries around the globe.

Source: aphria.ca

Aphria has a production capacity of 255,000 kg of marijuana a year, which makes it the third biggest producer. Its two biggest facilities, Aphria One and Aphria Diamond, have production capacities of 110,000 kg and 140,000 kg annually, respectively. In terms of price per production capacity, Aphria is neither an especially cheap nor an especially expensive stock, as it trades at $5,730 per kg of capacity right now.

Aphria had been in takeover talks with Altria ( MO), which chose to take a stake in another marijuana company (Cronos) instead. Some analysts still see Aphria as a potential takeover candidate by another acquirer.

It is remarkable that the biggest companies in this space, such as Canopy Growth or Tilray, are missing from this list, due to their valuations being significantly higher than those of the ones listed above. Tilray, for example, trades at $27,000 per kg of production capacity. If investors want a marijuana pure play, it seems reasonable to avoid those companies that are very popular, and instead choosing among those companies with a more reasonable valuation.

Indirect Exposure Marijuana Stocks

Marijuana pure play stocks have the problem that their valuations are not low at all, and that most of these companies are not profitable yet. It is also not guaranteed that they will become profitable (due to possible margin pressures for the industry). Last but not least investors don’t get any meaningful dividend yields from marijuana pure play stocks.

For investors that don’t want to invest in marijuana pure play stocks due to the reasons outlined above, and that seek exposure to the growing marijuana industry nevertheless, one possibility is to invest in stocks that are not marijuana pure plays, but that have some exposure to the industry nevertheless. This primarily includes consumer goods companies (beverage stocks, tobacco stocks) that have ventured into the marijuana space, but that continue to generate the majority of their revenues and earnings in an other industry. Our top five picks among these companies are analyzed below.

Indirect Marijuana Exposure Stock: AbbVie

AbbVie (ABBV) is a biotech company that is active in oncology and immunology primarily. AbbVie generates revenues of $32 billion annually and is highly profitable, primarily due to its biggest drug Humira, which is used for the treatment of rheumatoid arthritis, psoriatic arthritis and several other indications.

AbbVie has started a small venture into the (medical) marijuana industry. The company received FDA approval to sell its drug Marinol, which is marijuana-based. Marinol is used for the treatment of nausea and vomiting in patients enduring chemotherapy. Marinol is also used for increasing appetite in patients with HIV/AIDS or certain cancers.

Marinol is not a large revenue driver for AbbVie, but it seems possible that AbbVie will continue to expand in this space if there is potential for increased medical usage of marijuana or marijuana-based products.

Investors don’t have the high risks that are associated with an investment into a marijuana pure play, but could still benefit from growth of the medical marijuana industry. AbbVie trades at just 9.6 times 2019’s profits and offers a sizeable dividend yield of 5.1%.  It is one of our favorite Dividend Aristocrat buys today.

Indirect Marijuana Exposure Stock: Altria

Altria (MO) is one of the largest tobacco companies in the world. Altria produces and sells cigarettes under the Marlboro brand in the US.  The company also sells  several other cigarette brands, cigar brands, and non-smokeable tobacco products to round out the company’s product portfolio. In addition, Altria owns a 10% stake in Anheuser-Busch InBev (BUD), which is one of the world’s largest beer companies.

As a tobacco company Altria is primed for an expansion into the marijuana space, which is why the company has taken a stake in Canadian marijuana company Cronos. In December Altria agreed to pay $1.8 billion for a 45% stake in Cronos. Additionally Altria has an option to acquire another 10% at a slightly higher valuation.

Compared to Altria’s market capitalization of $98 billion this is not an overly large stake, but it provides an entry into this potentially large market. In case marijuana gets legalized in the US on a federal level, Altria could likely expand into this space very fast thanks to the know-how that the company acquires through its stake in Cronos.

Altria is highly profitable, trades at just 11.8 times 2019’s earnings, and offers a hefty dividend yield of 6.3% which makes it a high dividend stock. This makes Altria a compelling pick for investors that seek an income investment with some potential upside through a side-venture in the marijuana space.

Indirect Marijuana Exposure Stock: Associated British Foods

Associated British Foods (ASBFY) is a London, UK, based company that is active in different industries. The company operates in the sugar production and agricultural industries, but it also produces beverages, cereals, and other food products. Last but not least Associated British Foods has established itself as a low-cost apparel retailer with its Primark brand.

Associated British Foods has ventured into the marijuana industry by becoming a marijuana cultivater and supplier to the medical industry. Unlike many marijuana pureplays, Associated British Foods is highly profitable and produces sizeable cash flows (due to its other businesses), which means that this is a lower-risk stock that could potentially grow its marijuana business at a fast pace through organic investments.

As Associated British Foods is experienced in growing farm products and producing snacks and beverages (potential for marijuana-containing products) the expansion into the marijuana industry seems like a reasonable move.

Associated British Foods, which is valued at $21 billion, trades at 15.2 times next year’s earnings and offers an above-average dividend yield of 3.3%.

Indirect Marijuana Exposure Stock: Constellation Brands

Constellation Brands (STZ) is one of the largest alcoholic beverages companies in the world. Constellation Brands is focused on the wine and spirits markets, but it owns a small beer segment as well.

Constellation Brands made the news in summer 2018 when the company announced a $4 billion investment in Canadian marijuana company Canopy Growth. This deal diluted Canopy Growth’s existing shareholders, but it gave Constellation Brands a substantial position in the marijuana industry.

Constellation Brands sees significant potential for marijuana-infused beverages, and due to its experience in the beverages industry and its existing sales networks Constellation Brands will likely become one of the biggest players in this (potentially large) market.

Even if this venture does not work out, Constellation Brands would remain a profitable company, and investors would likely not suffer too much from a failure in this space. Constellation Brands trades at 18.3 times 2019’s earnings and offers a dividend yield of 1.7%, which is slightly less than what investors can get from the broad market.

Indirect Marijuana Exposure Stock: Molson Coors

Molson Coors (TAP) is a beverage company as well, but unlike Constellation Brands, it is focused on the global beer market. Molson Coors, which is based in Denver, CO, has moved into the marijuana industry through a joint venture with Hydropothecary, a Canada-based marijuana producer. The joint venture will focus on producing marijuana-containing, but alcohol-free beverages. The first market that the joint venture will address is the Canadian market, but it is likely that the company would expand globally if legalization in other countries allows for an entry into these markets. Due to Molson Coors’ existing global sales networks it is likely that it would be able to capture significant market share in overseas markets if the opportunity arises.

Molson Coors is trading at a relatively inexpensive valuation of just 11.9 times next year’s earnings, and investors get paid an above-average dividend yield of 2.8%.

The Best Marijuana Stocks

The marijuana industry is still very young. Both risks and potential rewards are elevated.

In the pure play space, Emerald Health Therapeutics looks inexpensive relative to other marijuana pure plays, but the company is rather small, which could be a headwind (but which could also make it an acquisition target).

Marijuana pure play companies are in general not profitable and do not pay dividends in most cases. More risk-averse investors with a goal of steady income generation should rather look at companies with some indirect marijuana exposure.

This list includes established companies with long and steady dividend growth records that will be more suitable for many investors compared to the higher-risk pure plays.

Among those stocks with indirect exposure AbbVie, Altria, and Molson Coors all look attractively priced, and they provide above-average income yields on top of that, while also giving investors the ability to benefit from growth in the marijuana industry without taking on a lot of risk.

Of these three, Altria is our favorite indirect exposure marijuana stock for its mix of high income, solid total returns, and strong marijuana industry potential.  AbbVie also has a high yield and excellent total return potential, but it’s marijuana industry prospects aren’t on the same level as Altria’s.  Molson Coors comes in a close second to Altria.  Molson Coors has a potentially large growth runway with marijuana based beverages and also has solid total return potential.  Molson Coors comes in a close second to Altria for our pick of indirect exposure marijuana stocks.

Final Thoughts

The trend over the last couple of years is clear around the world: Marijuana gets legalized, or at least decriminalized, in more and more countries, which means that the potential market continues to grow.

Investors should not blindly jump into this industry based solely on the market’s potential, though — many of the companies in this industry are not profitable, and investing in their stocks could be risky. It is not guaranteed at all that major marijuana companies (which are valued at $10 billion or more in some cases) will grow into their valuations in a reasonable amount of time.

Investors should take a close look at all relevant data points before making any decisions, especially in a higher-risk environment such as the emerging marijuana industry. Choosing lower-risk stocks which allow for some indirect exposure to the industry could be an opportune move.