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Forget Cannabis: This Stock Is a Far Better Way to Play This Space!

Photo: Plantlady223. Licence: https://creativecommons.org/licenses/by-sa/4.0/ Source: https://commons.wikimedia.org/wiki/File:Young_cannabis_plant_in_the_vegetative_stage_01.jpg

Looking for alternative ways to play speculative sectors such as the Canadian (soon to be legalized) cannabis space is something many investors have begun to explore. Whether it’s the potential to invest in cannabis suppliers that may see their volumes grow alongside the cannabis plants they supply to distribution companies or ways of playing government spending in this space, investors will certainly look to exploit every possible avenue as more details about how this commodity will be legalized emerge.

I have stated before that valuations within the cannabis production space currently make no sense to me, so I will not comment on that further in this article. Rather, I will discuss one creative way that investors can put their money to work in the cannabis sector to participate in the parabolic upside of this sector while simultaneously reducing any real reliance on cannabis prices.

Liquor Stores N.A. Ltd.  (TSX:LIQ) is a retailer of — you guessed it — liquor that primarily serves Western Canada and Alaska. The company operates a significant fleet of stores and has recently undergone a management overhaul, with a new team committed to investing in the company’s current square footage and private label opportunities, while seeking entrepreneurial opportunities to create value for shareholders.

One way Liquor Stores’ management team has gone about this is by proposing launching as many as 50 new cannabis retail locations, servicing a clientele in Western Canada, which has been shown to consume more marijuana on average than the average Canadian.

This proposed investment has been spurred by a recent strategic investment made in Liquor Stores by Aurora Cannabis Inc.  (TSX:ACB) in Liquor Stores for $15 per share (20% initially in the expectation that Aurora will purchase another 5% at the $15 level). This large investment had initially propelled Liquor Stores’ stock price near the $13 level following the announcement; however, in recent weeks the company’s share price has once again fallen to pre-announcement levels, currently hovering around the $10 level.

While paying a significant premium for access to a very large block of shares may be commonplace in the cannabis sector among producers, that Aurora may be willing to invest in Liquor Stores at a 50% premium today suggests either Aurora’s management team is out of touch with the market dynamics in the retail space or that the team are able to firmly place their fingers on what the company will need to do to enhance margins at the retail level and thus bolster the company’s position in what may otherwise be a rather constrictive supply chain.

Bottom line

I have said before that Aurora’s move into the retail space was a smart one at the time, and I believe this partnership may be one of the outstanding stories of 2018 in years to come. For investors looking to get a piece of the action, at Liquor Stores’ current stock price of $10, a 50% premium is being implied by Aurora.

If you’re bullish on cannabis, the best play in this space may be to forget producers completely and look for opportunities further down the value chain (grabbing an implied 33% discount never hurts either).

Stay Foolish, my friends.

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

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