Investors are eagerly awaiting the arrival of the legal cannabis market in Canada and wondering which marijuana stocks offer the best opportunity to generate big gains in the share price next year.
Aurora Cannabis went on a massive buying spree this year, taking over two major competitors in a bid to solidify itself as a leading supplier of medical marijuana to both the Canadian and international markets.
The additions of MedReleaf and CanniMed made Aurora Cannabis the number two player behind Canopy Growth in the Canadian market, giving the company valuable brands and important production capacity to serve the growing medical marijuana segment and position Aurora Cannabis to compete in the upcoming legal recreational market.
Aurora Cannabis also has its eye on large international opportunities and recently announced a $290 million deal to buy ICC Labs, which has a 70% market share in Uruguay, where legal recreational sales already exist. In Europe, Aurora Cannabis has a presence in Germany, Italy, and Denmark.
At the time of writing, the stock trades for $12.80 per share, giving the company a market capitalization of more than $12 billion.
Rumours of a possible deal with a major international beverage company gave the stock a big boost in recent weeks, and while no agreement has been announced, investors appear to think it is just a matter of time, as the shares are trading at their highest level since January.
Canopy Growth jumped into an early lead in the Canadian and global medical marijuana market. The company began buying up competitors when prices were much lower, including the acquisition of Mettrum Health at the start of 2017 that cemented Canopy Growth’s dominant position in the medical marijuana space.
Canopy Growth also established its presence in Europe and Australia earlier than most of its peers and has made recent moves to beef up its presence in Latin America. Canopy Growth has research facilities in Chile and production operations in Colombia.
In preparation for the legalization of the recreational market in Canada, Canopy Growth has partnered with Constellation Brands. The first investment of $245 million nearly a year ago gave Constellation Brands a 9.9% interest in Canopy Growth. The second investment of $5 billion, announced in August, increased the stake to 38%. Canopy Growth and Constellation Brands have a head start on the rest of the industry, and that should give it a leg up when the sale cannabis-infused drinks becomes legal in Canada.
In addition, Canopy Growth has added strategic assets focused on the emerging cannabis culture. The company purchased leading cannabis brand company Hiku Brands earlier this year.
Canopy Growth has a market capitalization of more than $14 billion.
Is one a better bet?
Both stocks look very expensive after the rallies that occurred in the past two months, so investors should be careful when buying today. A recent study by the C. D. Howe Institute suggests production in Canada might only be able to supply 30-60% of cannabis demand once the recreational market opens. As a result of supply issues, as well as pricing concerns, there is a possibility many buyers will turn to the black market.
That said, if you are a long-term cannabis bull and think 2019 is going to be a big year for the sector, I would probably make Canopy Growth the first choice.
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Fool contributor Andrew Walker has no position in any stock mentioned.