Which Canadian Marijuana Stock Will Be the Biggest Winner?

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A new market as large as $8.7 billion per year could open up in Canada in 2018. That's the high end of the range projected by accounting and consulting firm Deloitte for the Canadian recreational marijuana market. Prime Minister Justin Trudeau is pushing to legalize recreational use of the drug by next summer. 

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Several marijuana growers already dominate the medical marijuana market in Canada and stand to benefit if the country legalizes recreational marijuana. The publicly traded companies on the list include Aphria, Aurora Cannabis, Canopy Growth, and MedReleaf. Which of these Canadian marijuana stocks is poised to be the biggest winner of all?

By the numbers

One way to evaluate the likelihood of future success is to look at each company's past track record. Here's how the four Canadian marijuana suppliers compare on key financial metrics.

Company Market Cap Price-to-Sales (TTM) Revenue (TTM) Net Income/(Loss) (TTM)
Aphria (NASDAQOTH: APHQF)  $643 million 40  $16.1 million  $3.3 million
Aurora Cannabis (NASDAQOTH: ACBFF)  $699 million 66  $10.5 million  ($12.3 million)
Canopy Growth (NASDAQOTH: TWMJF)  $1.2 billion 30  $38.4 million  ($13.4 million)
MedReleaf (NASDAQOTH: MEDFF)  $594 million 18  $33.1 million  $6.7 million

If your figurative bottom line is the literal bottom line, MedReleaf appears to be in the best shape. However, the net income/loss amounts probably shouldn't be the thing to focus on the most. For example, while Canopy Growth lost more over the last 12 months than its peers, much of that loss stemmed from the company's aggressive acquisitions strategy.

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Canopy Growth's and MedReleaf's sales results over the past year significantly outpaced those of Aphria and Aurora Cannabis. Some of that gap stems from capacity. Aphria is moving forward with a major expansion of its Ontario greenhouse facility to ramp up its capacity, a move that should allow the company to increase sales significantly. It's not the only marijuana grower expanding, though. 

While Canopy Growth ranks at the top in revenue, Aphria maintains that it has the best cost structure. That might not be an exaggeration -- the company's earnings as a percentage of revenue easily topped Aurora Cannabis and Canopy Growth and narrowly edged out MedReleaf.

On the other hand, MedReleaf has the lowest price-to-sales ratio of the bunch. While MedReleaf's ratio of 18 is sky-high, it pales in comparison to those of the other marijuana stocks. 

Beyond the numbers

What the numbers don't tell, however, is what each of these companies is doing to grow. Aphria, for one, isn't just expanding its Canadian capacity. The company is also increasing its presence in the United States. Aphria owns part of Arizona medical marijuana provider Copperstate Farms, and it acquired Florida medical marijuana grower Chestnut Hill Tree Farm. 

Aurora Cannabis improved its position in the Canadian medical marijuana market (which continues to grow significantly) with its acquisition in 2016 of CanvasRx, Canada's largest medical marijuana patient outreach service. The company is also targeting the German medical marijuana market with its purchase in May of Pedanios GmbH, a leading German wholesale importer, exporter, and distributor of medical marijuana. 

Canopy Growth is active in multiple international markets, including Australia, Brazil, Chile, and Germany. The company acquired German distributor MedCann in November 2016. The subsidiary now operates in Germany as Spektrum Cannabis Germany and recently passed the first stage of the process to become a licensed producer of medical cannabis in Germany. However, Canopy Growth is intentionally remaining on the sidelines in the U.S. market because of its desire to only conduct business "in jurisdictions where it is federally legal to do so." 

Like Canopy Growth, MedReleaf has also expanded internationally. The company completed its first export to Brazil in July. MedReleaf is also moving forward in the regulatory process for supplying marijuana to Australia (through partners in that country) and in Germany (through its subsidiary MedReleaf Germany GmbH). 

Most likely to succeed

Perhaps the best answer to the question as to which of these marijuana stocks are likely to succeed is "all of the above." If Canada moves forward with legalization of recreational marijuana as expected, all four companies should enjoy tremendous growth.

But which stock is most likely to succeed from an investing standpoint? It's a tough decision, but my nod goes to MedReleaf. It's not far behind Canopy Growth in total sales, and like Canopy Growth, MedReleaf is also well positioned in Germany. The company's cost structure also appears to be a big plus. MedReleaf had the misfortune to have an IPO at a relatively bad time for marijuana stocks in general, which I think is a big reason why it claims a more attractive valuation than its peers.

Keep in mind, though, that all four of these stocks are priced at astronomical levels. There's a ginormous expectation for growth baked into each stock. Any -- and I mean any -- bumps in the road with legalization of recreational marijuana in Canada or exporting to international markets could cause the stocks to plunge. MedReleaf looks like the most likely to succeed in my view, but success certainly isn't guaranteed. 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.