These 2 Companies Are the Only Marijuana Companies Investors Should Consider

Some may win, and some may lose, but the two cannabis companies I believe will outperform in the long run are Aphria Inc. (TSX:APH) and Aurora Cannabis Inc. (TSX:ACB).

| More on:

The budding marijuana industry in Canada is set to explode, according to a number of key industry players banking on a wave of increased consumption from groups that have otherwise steered clear of the green commodity. With only a few large cannabis producers jockeying for position in a bid to control the largest piece of what may turn out to be a very big pie, the Canadian marijuana market appears to be shaping up as a quasi-horse race, with a podium of winners and a number of companies potentially on the outside looking in.

To avoid betting on the wrong horse (or horses), I’ve pared down the list of companies that I believe will outperform their peers to two firms: Aphria Inc. (TSX:APH) and Aurora Cannabis Inc. (TSX:ACB).

While the correlation among most marijuana producers is quite high (stocks tend to move in a similar direction over time), it is also true that companies have begun to diverge as investors stake their claims to the select few companies they believe will outperform in the long run. I suggest investors interested in considering Aphria or Aurora use a long-short strategy to isolate these firms from competitors that may not fare so well in the long term.

By shorting the company an investor believes will underperform and taking a long position on the company an investor wishes to bet on, an investor has limited their downside to how the companies perform relative to each other, rather than relative to the market. Thus, the investor accepts the idiosyncratic risk relevant to the desired firm, while reducing their exposure to market or systematic risk.

Aphria Inc.

There are a couple of reasons I am a fan of Aphria, and both have to do with the focus placed on profitability from the company’s management team. In an industry where everyone seems to be in a race to produce the most (and, by the way, Aphria has some pretty impressive production numbers), Aphria has done a very good job of producing cannabis at a profit over a large enough period that I am comfortable with how this company is choosing to grow.

Aphria is Canada’s largest greenhouse producer of cannabis, and it has reduced its production costs to industry-leading levels. The ability of Aphria to churn out long-term profits appears to be without question, making this company a fundamental investor’s dream as far as cannabis concerns go.

Aurora Cannabis Inc.

Aurora is somewhat of a fringe company and has not seen as much publicity of late compared to its more outspoken peers. That said, the Aurora Sky facility currently under production gives Aurora a potential leg up on the competition in the ability of the firm to outproduce nearly every company on the market with a high-quality product that may turn out to be the drug of choice for cannabis users across the country.

Since arriving on the TSX, Aurora has produced a -11% return for investors, a fact which has not enamoured many investors and has resulted in this company largely being overlooked, in my opinion. What I see with Aurora is a long-term value play, and should prices drop even more, it may make sense to nibble away at this name for an investor keen in buying into the long-term story which is the cannabis industry.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »