In the past year, there are few sectors in the stock market that have garnered more attention than the marijuana industry. The hype surrounding the potential recreational market in Canada has caused a run-up in the stock prices of publicly-traded marijuana producers, resulting in unrealistic valuations.
With inflated stock prices and many unknowns regarding the future of the industry, should investors refrain from obtaining exposure to the emerging marijuana industry?
Obviously there is a lot of speculation regarding the pot stocks, however, I truly believe there is one company that should emerge a winner, and that company is Aphria Inc. (TSX:APH).
Here’s two reasons why I believe they are positioned to remain an industry leader:
The greenhouse effect
Aphria produces its marijuana in greenhouses and this method of production allows the company to have some of the lowest costs per gram in the industry. Therefore, if the illegal market tries to undercut the recreational selling prices, Aphria has a good chance of survival since the company can remain profitable if its margins need to be reduced.
Although the use of greenhouses results in lower costs, it has its disadvantages. When marijuana is grown in an indoor facility, producers can grow five to six crops per year in a single room. In addition, the yield is more predictable and essentially the same output is produced every time.
However, a single room in a greenhouse only produces three crops per year. In addition, there are more variables to consider in the production process such as sunlight and humidity, which can significantly impact the yield of each crop.
That being said, Aphria has mastered greenhouse production and is in the process of increasing its greenhouse growing to 1 million square feet. Therefore, it will be difficult for other producers to replicate its production process and capacity at this time. Its low cost advantage should be sustainable, and the company will be able to meet the market demand once marijuana becomes recreational.
Carving its own path
CEO Vic Neufield has made it abundantly clear that Aphria is going to beat to its own drum. The company has indicated it won’t try and attract celebrity names like Snoop Dogg and Trailer Park Boys for branding, nor acquire other publicly traded producers in Canada. Aphria will continue to use its strong cash flows to grow the business organically.
Other producers have been aggressive in their expansion plans, however, Aphria has been expanding at a moderate pace, and has been managing its capital effectively. With its strong leadership at the top, Aphria should remain a leader in the marijuana industry for years to come.
Foolish bottom line
As Foolish investors know, pot stocks are not a core holdings. However, it doesn’t mean investors should run scared of this industry. It’s highly speculative but the potential recreational market could be massive. Therefore, if you do decide to acquire exposure to this industry, stick with larger producers like Aphria and make sure it’s only a small portion of your portfolio.