Many investors find themselves in a spot where they must choose between Canopy Growth Corp. (TSX:WEED) and Aurora Cannabis Inc. (TSXV:ACB) as their marijuana stock of choice. Both companies will be subject to volatility going forward, but there’s also huge growth potential.
Which one of these promising marijuana picks is right for your portfolio?
The case for Canopy Growth Corp.
Canopy has been pulling back after a class-action lawsuit was filed against it for Mettrum’s use of banned pesticides. Bargain hunters may be considering the stock now that it’s at a better price, but is it really the best marijuana play out there? Investor pessimism is increasing, and it looks like the stock could get hammered further, so if you’re a contrarian, it may make sense to pick up shares on the way down.
You might think all the negative news is already baked in to the stock price, but Canopy could decline even further from here. All marijuana companies are vulnerable to headline risk, but I’d say Canopy is the most vulnerable, especially after the tainted marijuana scandal. It’s possible we could see more negative news arise as we learn more details about the lawsuit filed against it.
After the lawsuit is settled, we probably won’t hear more about banned pesticide usage in the future because all marijuana producers are going to be cautious with regards to testing going forward. I suspect all companies will be following strict testing procedures, so I think it’s safe to say tainted marijuana fears are going to be in the rear-view mirror in a few months.
Canopy is looking into creating exclusive genetics by breeding plants with desirable traits. The company’s promising research and development initiatives may be able to select seeds based on genetic traits in the future. This is a game changer, and it goes to show that marijuana stocks aren’t just your typical commodity plays. Sure, there’s a commodity aspect, but I believe research and development could determine who will become the industry leader a few years down the road.
Canopy definitely has some promising potential, but the company is currently operating at a loss, and the cost per gram of marijuana produced could definitely use some improvement. Did I also mention how expensive the stock is right now? Sure, the stock pulled back by 23.35% from its November high, but I still think you’d be paying a huge premium.
The case for Aurora Cannabis Inc.
If you’re looking for a lower-cost producer with promising capacity growth prospects, then you might want to consider Aurora Cannabis Inc. (TSXV:ACB). The company is constructing its Aurora Sky project, which is expected to be one of the largest low-cost marijuana-production greenhouses in the world.
Aurora Cannabis won’t be running into banned pesticide issues either since the company has a strict quality control procedure where all of its products are tested thoroughly.
Cannacord Genuity analyst Neil Maruoka stated that he thinks Aurora Cannabis is worth $5 share if marijuana becomes legalized.
The company just reached an agreement to buy Peleton Pharmaceuticals for $7 million. Peleton is currently working on a 40,000-square-foot cannabis-production facility in Quebec. Mr. Maruoka has a speculative buy on Aurora Cannabis and believes that the recent acquisition of Peleton will allow Aurora to have a terrific low-cost presence in eastern Canada. Mr. Maruoka also thinks Aurora Cannabis will see $10.2 million and $80.2 million worth of EBITDA for fiscal 2017 and 2018, respectively.
The stock is not exactly cheap, but I think it may be worth it if the Aurora Sky project succeeds. That’s a big if though. The Peleton acquisition is also a perfect fit for the company at what I think is a bargain price.
Both of these stocks are speculative plays that could soar into the atmosphere, but I think Aurora is a better buy right now because I’m a huge fan of the management team’s focus on efficiency.
Both stocks are quite risky, but I think Canopy is the riskier choice at current levels given the fundamentals aren’t as attractive. Canopy is also in some hot water right now, so I’d wait until the situation cools off before giving it another look.
Personally, I’m on the sidelines, because I can’t stomach the volatility.
Stay smart. Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any stocks mentioned.