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2 Cannabis Stocks Just Hit a Massive Buy Signal

Alimentation Couche-Tard (TSX:ATD-A)(TSX:ATD-B) shareholders shouldn’t worry about the planned 2-for-1 stock split on September 20. The stock split likely represents the company’s confidence that this year’s capital gains are not only sustainable but will continue into next year.

Alimentation Couche-Tard stock has been flying on the Toronto Stock Exchange (TSX) since announcing its intentions to expand its investments into the cannabis industry. In the past year, the stock soared 30% to nearly $87 per share from just over $65.

Canadian investors should keep an eye on Alimentation’s most notable cannabis investment: Fire & Flower Holdings (TSX:FAF). At the beginning of August, Alimentation announced the purchase of over 24 million shares in Fire & Flower, representing a 9.9% ownership stake.

More important, however, is that Alimentation also retains Common Share purchase warrants that will, upon exercise, increase Alimentation’s ownership stake to just over 50%.

Constellation Brands also began with a 9.9% initial ownership stake in Canopy Growth with the option of majority interest in warrants. It is safe to assume that Fire & Flower’s stock price will gradually appreciate as Alimentation exercises these warrants. Along with Fire & Flower’s success, the value of Alimentation’s shares will also increase.

The pair is ultimately a good match. Because Fire & Flower’s retail margins are weak compared to major competitors, Alimentation was able to snatch up its ownership stake at a bargain price.

Even better is that Alimentation’s strength is maximizing retail margins. Shareholders have every reason to feel confident that Alimentation can help Fire & Flower become a competitive cannabis powerhouse.

The risk?

Although not necessarily an issue, Alimentation stock is indeed pricey, with above industry-average shares outstanding of over 560 million. The high valuation most likely reflects shareholder optimism in the success of Alimentation’s cannabis investments.

By comparison, Loblaw (TSX:L) total shares outstanding stand at 366 million, 50% less than Alimentation. After Alimentation’s 2-for-1 stock split, Couche-Tard shares outstanding will be three times that of Loblaw.

Meanwhile, Loblaw’s share price will not even be twice that of the expected $45 Alimentation share price post-stock split. After the 2-for-1 exchange, Alimentation shares will start selling for half the current share price of just under $90.

Also, shareholders in Alimentation will still receive just a low 0.58% dividend yield when they could be cashing in on the 1.69% yield at Loblaw. Thus, ATD shareholders are betting on further capital gains. If demand proves to be less potent than necessary for the stock to maintain price momentum post-split, shareholders could see their returns dwindle.

Foolish takeaway

The number one mistake that Tax-Free Savings Account (TFSA) investors are making today is not taking on enough risk in their portfolios. There is no such thing as a risk-free investment, but even bad investments pay off in other ways. One of the smartest investors once said that losses in the stock market are nothing more than expensive lessons.

The best decision Canadian investors can make today is the choice to diversify long-term savings in high-return assets, which means that Canadian investors should buy shares in both Alimentation and its lower-priced peer, Loblaw.

Finally, at around $1.50 per share at writing and the backing of a politically powerful brand such as Couche-Tard, TFSA investors should consider at least a 100-share investment in Fire & Flower. The low share price makes this a practically risk-free investment with the prospect of substantial long-term returns.

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Fool contributor Debra Ray has no position in any of the stocks mentioned. Alimentation Couche-Tard is a recommendation of Stock Advisor Canada.

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