This Up-and-Coming Marijuana Play Could Be the Best Performer in 2019

Here’s why Hydropothecary Corp. (TSX:HEXO) could give Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) a run for its money in 2019.

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

With a firm legalization day in the books, all eyes will be on the marijuana space, as companies ready themselves for a triple-digit sales-growth opportunity that’s hard for many of today’s investors to fathom. Forget year-over-year growth; with marijuana demand poised to overwhelm supply in the first few years after legalization, many of today’s up-and-coming pot stocks are capable of quarter-over-quarter numbers that would blow your highest-flying NASDAQ-traded security completely out of the water.

Moreover, it’s not just the Big Three Canadian producers that stand to profit profoundly from the lifting of prohibition. The space is about to get crowded, as Health Canada grants more licences to up-and-coming firms that will contribute to the gradual increase in aggregate marijuana supply to form a market equilibrium at some point in the 2020s.

Before you back up the truck on some random pot stock, though, you should know that possession of a licence to grow is simply not good enough for Foolish investors. Quarterly reports are chalk-full of questionable accounting tactics, and speculation has taken control of the marijuana space. It’s important to remember that Warren Buffett’s principles still apply, even in a world that’s clouded by marijuana smoke.

When looking for the next Canopy Growth Corp. (TSX:WEED)(NYSE:CGC), it pays dividends to look for a company that’s truly differentiated itself from the pack, because, as you may know, the barriers to entry are low, and you’ll want a firm with the ability to stick it out and continue thriving once the “green rush” window closes off.

Enter Hydropothecary Corp. (TSX:HEXO), the hottest new pot stock to graduate to the TSX after skyrocketing 270% over the past year. The Quebec-based marijuana producer prides itself on its impeccable quality-assurance procedures and a line of branded products that have found a spot among Quebecois stoners.

Solid customer loyalty within the Quebec market

In a previous piece, I’d noted that the Quebec market has a preference for local Quebecois brands over other national brands. With such loyalty for Quebec-based products, one ought to think that Hydropothecary has the unique advantage as a Quebec firm that’s expanding outwards.

This April, Hydropothecary signed a five-year supply deal with Quebec’s alcohol distributor, which could see over 200 metric tonnes of marijuana being distributed across Quebec. While there’s certainly no wall surrounding the Quebec border, it certainly will seem like it for producers looking to break into the Quebec market to take away Hydropothecary’s dominant share.

Overlooked brand power

The federal government is not a fan of branding on marijuana packages, but this may change in a few short years after legalization day.

Hydropothecary is really doubling-down on brands in the meantime anyway. Who knows?

With an already devoted Quebecois fan-base, the company may give Canopy a run for its money when it comes to branding prowess. Branding is a big deal, and I believe it will be directly proportional to the success of companies over the long term, as the nascent industry has the opportunity to mature.

The most unique product offered by Hypothecary is its signature product line called “Time of Day,” which could be an absolute hit among recreational users. The product line has a strain of dried bud that’s customized for various times of the day, from “Good Morning” indica-hybrid strains to “Bedtime” high-THC indica strains.

The packaging lacks any apparent branding but possesses intriguing cartoonish birds that are really the closest thing to a brand that may get an okay from the federal government.

Bottom line

Hydropothecary is a rapid up-and-comer that could become a fourth major player alongside Canopy, Aurora Cannabis Inc. (TSX:ACB), and Aphria Inc. (TSX:APH) over the next year or so. The company, like many other dominant players in the space, is poised to consolidate the marijuana industry, which is about to get crowded.

Stay hungry. Stay Foolish.

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 Joey Frenette has no position in any of the stocks mentioned.

More on Investing

Hands holding trophy cup on sky background

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Here are three top TSX growth stocks that may be worth a look, given the significant valuation declines these stocks…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Man data analyze
Stocks for Beginners

Beginners: 2 Market-Beating Stocks Just Getting Started

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX:CSU) are proven market beaters that could continue their ways.

Read more »

oil and natural gas
Energy Stocks

Small OPEC+ Oil-Output Hike: Buy More Energy Stocks?

Energy stocks could soar higher, because oil markets will remain tight due to the small production increase by OPEC+.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

edit Person using calculator next to charts and graphs

Where to Invest $500 in the TSX Right Now

Long-term investors can look to buy stocks, including Suncor Energy and Shopify, as they are poised to outpace the broader…

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

falling red arrow and lifting

2 Oversold TSX Stocks That Should Bounce Back

Stocks that are oversold without an external catalyst like a market crash or a weak sector might be risky buys,…

Read more »