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2 Cannabis Stocks: Buy 1 and Sell the Other

Investing in the marijuana industry has been a wild ride full of 50% drops and 100% gains. With several investable companies now on the market, it’s important to know that there are major differences between each cannabis company. Even if the industry explodes, some stocks will win while others may lose.

Two of the most talked about companies are Green Organic Dutchman Holdings (TSX:TGOD) and Cronos Group (TSX:CRON)(NASDAQ:CRON). While both appear to have bright prospects, one stock is clearly better positioned for more upside.

A tale of two companies

The current state of these two companies couldn’t be more different. Green Organic earned $0 in revenue last quarter, resulting in an $11 million loss. Cronos, meanwhile, generated more than $17 million in sales in 2018. But one similarity exists: the market anticipates massive growth for both companies in 2019 and beyond. Cronos, for example, is expected to triple revenues this year.

While both companies have lofty expectations for growth, their share price movements couldn’t be more different. Since September, Green Organic’s stock has fallen by around 60%. Cronos shares, for comparison, have more than doubled.

Why the difference? I would argue that Cronos has been swept up by buyout fervor, while Green Organic has been left in the dust.

On December 7, Altria Group took a 45% stake in Cronos for $2.4 billion, or about $16.25 per share. The market had been bidding up cannabis stocks in anticipation of bigger players making transformational acquisitions at premium prices. Cronos was one of the first companies to see these expectations become a reality.

As I wrote in February, “With Altria as a partner, Cronos is one of the best-positioned cannabis stocks in a high-growth industry.” But that doesn’t mean shareholders will win, especially if you overpay.

The valuation clearly favours this company

Next year, Cronos is expected to generate roughly $86 million in revenue. If that level of sales is achieved, shares currently trade at a whopping 60 times forward revenue. While the cannabis market may surpass $100 billion in North America over the next decade, it’s likely the market is pricing in a large amount of short-term buyout speculation.

Green Organic shares are a relative bargain. Next year, the company is expected to generate $373 million in sales. With a market cap of just $920 million, shares trade at less than three times forward revenue. From a valuation perspective, it’s clear which stock to buy.

Over the next few years, Green Organic should be able to compound this growth. “By 2021,” I recently estimated, “Green Organic may have 170,000 kilograms of premium-priced organic cannabis under production, plus a cash flow positive CBD business that’s capable of tapping a global market.”

Green Organic is also one of the only Canadian cannabis producers capable of meeting growing international demand for certified organic marijuana. It’s primed to take a big market share in Canada’s $9 billion cannabis market. Plus, it’s been building exposure to high-growth areas like Jamaica, Europe, Mexico, and the U.S.

While Cronos may get all the hype, you’re likely better off avoiding its shares in favour of Green Organic.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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