This has been something of a bifurcated year for the marijuana industry.
On one hand, Canada became the first industrialized country in the world to legalize recreational weed, and more states in the U.S. legalized cannabis in some capacity. In other words, the legal pot industry has legitimacy now, and that should, over time, translate into some clear winners.
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On the other hand, marijuana stocks performed miserably in 2018, with the Horizons Marijuana Life Sciences ETF, a fund that currently holds about four dozen pot stocks, losing more than a third of its value since the year began.
Value, or value trap?
Then again, this decline could open the door for opportunistic (and strong-stomached) investors to dip their toes in the water. With marijuana stocks suffering through an otherwise miserable year, quite a few have forward price-to-earnings ratios that can reasonably be called "cheap." Of course, as we often learn as investors, there are sometimes valid reasons for a company to trade "cheaply" compared to its peers.
Here are three pure-play marijuana stocks that appear to be shockingly cheap.
The Supreme Cannabis Company: Forward P/E of 12.7
Admit it, no one correctly guessed that little-known Toronto-based grower, The Supreme Cannabis Company (NASDAQOTH: SPRWF), is currently the cheapest grower at a forward price-to-earnings ratio of less than 13.
The Supreme Cannabis Co. flies below the radar because it hasn't engaged in the acquisition one-upmanship that many of its peers have. Rather, it's chosen to focus on its 342,000-square-foot 7ACRES facility. This grow site might generate as much as 50,000 kilograms when operating at full capacity.
In one context, that's not a lot of production, which means it'll probably be overlooked by most investors. However, focusing on a single grow site does allow the company to hone in on brand differentiation, as well as to centralize its costs. By angling to produce premium marijuana, Supreme Cannabis may be able to avoid the commoditization concerns that have plagued recreational-legal states in the U.S.
To be clear, Supreme Cannabis is no surefire investment. If Canadian weed supply follows in the footsteps of select U.S. states and soars by the early part of the next decade, the company's focus on dried cannabis could actually come back to haunt its operating margins. But it's nevertheless become watchlist-worthy because of the potential value it offers.
Aphria: Forward P/E of 14.8
Sometimes fundamental metrics alone don't tell the full story. That's the case with Ontario-based grower Aphria (NYSE: APHA), which has a forward P/E of less than 15.
Aphria's stock has completely unraveled over the past week after a report was released from short-seller Quintessential Capital Management that alleges Aphria grossly overpaid for three assets in Latin America and the Caribbean. Quintessential's report, which was co-authored by forensic analysis firm Hindenburg Research, asserts that these assets were purchased from Canadian shell companies for a fraction of their sale price by SOL Global Investments (formerly Scythian Biosciences). Furthermore, the report links SOL's chairman and Aphria advisor Andy DeFrancesco to all three assets.
Even with Aphria vehemently denying these claims and standing behind its Latin American acquisitions, it's troubling that this is the second time in less than nine months that a purchase has come into question. Back in March, Aphria closed the CA$425 million buyout of Nuuvera, which opened the door to eight new markets for the company. However, Aphria CEO Vic Neufeld and members of his management team didn't disclose their stakes in Nuuvera until a day prior to the closing of the deal. While not unheard of for a management team to have a vested stake in a company being acquired, Wall Street and investors would want to know about it long before a day prior to closing.
The trouble for Aphria is that it's going to struggle to regain investors' confidence. Sure, it could achieve the third-highest annual output of all growers at 255,000 kilograms of peak estimated production, but that's meaningless if investors don't trust management to operate in the best interest of investors. For the time being, Aphria is a marijuana stock worth avoiding, despite its perceived "cheapness."
HEXO: Forward P/E of 20
Perhaps the most intriguing value of all is HEXO (NASDAQOTH: HYYDF), with a forward P/E of only 20.
HEXO brings two factors to the table that investors are bound to appreciate. First, there's the potential to be a top-10 producer, with an estimated 108,000 kilograms of peak annual production. Currently undertaking a 1-million-square-foot expansion in Quebec that's expected to be complete before the end of this year, HEXO appear to be ahead of the game on the capacity expansion front.
Secondly, HEXO has a brand-name partner in its back pocket. On Aug. 1, HEXO formed a joint venture with Molson Coors Brewing Co. to develop cannabis-infused beverages. Interestingly enough, most alternative consumption options (including infused beverages) aren't legal in Canada right now. The expectation is that Parliament will discuss and approve new consumption options next summer, albeit no official timeline has been released. With Molson Coors by its side, HEXO presumably has a path to enter new markets and a partner that really understands how to market new products to consumers.
As a stand-alone company or a possible buyout candidate, HEXO might be worth a closer look.
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