The Best Marijuana Stocks to Buy in 2018

In case you hadn't noticed, the marijuana industry is absolutely on fire. According to cannabis research firm ArcView, the North American legal weed industry grew by 34% in 2016 to $6.9 billion, and is expected to grow by an average of 26% per year through 2021. If ArcView's estimates come to fruition, the legal weed market would be worth $21.6 billion in North America by 2021. This sort of rapid and consistent growth is incredibly difficult to find, which is why investors have flocked to marijuana stocks in recent years.

However, the marijuana industry is somewhat disjointed. An investor can't just throw a dart and pick a winner, because the industry is thriving in some countries while struggling mightily in others.

For instance, though the U.S. could potentially generate tens of billions in annual legal cannabis sales, the federal government maintains a strict Schedule I categorization on pot. This means it's wholly illegal and on par with heroin and LSD. What's more, as a Schedule I drug, marijuana businesses in the U.S. have little or no access to basic banking services, and many are unable to take corporate income tax deductions as a result of selling a federally illegal substance.

In other words, investing in U.S.-based pot stocks isn't such a great idea at the moment. But that's not true for all countries. If you're looking to dip your toes in the water, or should I say plant a seed in this budding industry, the best marijuana stocks to buy in 2018 are probably going to be found in Canada.

Here's why Canada is the place to invest in marijuana stocks this year

Why Canada? To begin with, it's been a medical cannabis-legal country since 2001. Overseen by Health Canada (essentially the equivalent of the U.S. Department of Health and Human Services), the medical pot industry in Canada has flourished. As of May 2017, eligible patient growth was increasing at about 10% per month, and a number of Canadian-based cannabis stocks were marginally profitable on medical pot sales alone.

However, the bigger catalyst is the expected legalization of recreational marijuana by July 1, 2018. This past April, Prime Minister Justin Trudeau introduced legislation that would allow adults in Canada to purchase cannabis legally beginning in July 2018. Despite hurdles, the bill appears to have an increasingly clearer path to becoming law.

For example, conservatives in Canada's parliament have argued that recreational weed would make regulating driving under the influence offenses difficult to enforce. They've also opined that a home-grow option, which is commonplace with adult-use legislation, would open the door to easier access for adolescents. Conservatives, however, are a minority in parliament, paving the way for progressive lawmakers to potentially implement this legislation.

Furthermore, the Canadian federal government worked out a two-year deal with the individual provinces regarding the sharing of tax revenue derived from cannabis sales. The provincial officials complained when the original share was slated to be a 50-50 split, since they're responsible for the up-front costs associated with regulation and enforcement. Under the recently worked out two-year deal, the provinces will receive 75% of tax revenue, with the federal government receiving the other 25%.

Everything seems to be aligned for Canada to become the first developed country to legalize recreational marijuana, which could add $3.7 billion to $5 billion in annual sales.

The best marijuana stocks to buy in 2018

But let's be clear: This is really great news for the four Canadian marijuana stocks with the highest market share. The top marijuana stocks this year just might be Canopy Growth Corp. (NASDAQOTH: TWMJF), Aurora Cannabis (NASDAQOTH: ACBFF), Aphria (NASDAQOTH: APHQF), and MedReleaf (NASDAQOTH: MEDFF).

Canopy Growth is sort of the kingpin of this industry, and by all accounts could control in the neighborhood of a fifth of all market share in the medical and recreational market. It's also a company that's not been shy about buying its way to quick growth. It acquired Mettrum Health almost a year ago to the day, and it has 2.4 million square feet of growing capacity under construction or in development in British Columbia, with the option of acquiring another 1.7 million square feet there for capacity expansion. With the best-known cannabis brand in the country in its back pocket (Tweed), as well as additional revenue channels via dried cannabis exports to a number of European countries that have legalized medical marijuana, Canopy Growth's bottom line should soon look a lot greener.

Aurora Cannabis, which has recently been rivaling Canopy Growth for the top spot in terms of largest market cap, is bringing a blend of organic growth and acquisition potential to the table. It has an ambitious project known as Aurora Sky that's slated for completion in mid-2018. This state-of-the-art 800,000-square-foot facility is expected to yield around 100,000 kilograms of dried cannabis a year and drastically reduce the company's dried cannabis growing costs. At the same time, it's also trying to acquire Saskatchewan-based CanniMed Therapeutics via a hostile bid. The combined company would be capable of an estimated 130,000 kilograms of dried cannabis production each year.

Meanwhile, Aphria is focused almost exclusively on organic expansion. It has a more than $100 million, four-phase expansion project underway that should be finished in January 2019. When complete, the 1 million square feet of growing capacity could yield approximately 100,000 kilograms of dried cannabis a year. Furthermore, Aphria also recently struck a deal with Shoppers Drug Mart, which is part of the Loblow Companies, to be its exclusive supplier of dried cannabis online. Mind you, Shoppers Drug Mart has 1,300 stores nationwide, so this is a major boost in visibility for Aphria. And, as icing on the cake, it also has the ability to export dried cannabis to foreign countries that have legalized medical cannabis.

Finally, MedReleaf stands to be a big winner, especially having gone public last year. The money raised from its initial public offering is allowing it to expand its Bradford, Ontario, facility. But more important than simply cranking out more cannabis is the type of cannabis production it's focused on. You see, MedReleaf has been producing higher-quality strains of cannabis for a more affluent medical patient. Additionally, it's also leaned on extracts and cannabis oils, which are higher-price and higher-margin items. Of these four marijuana stocks, none has generated a healthier profit over the past two years than MedReleaf.

If marijuana stocks are on your radar in 2018, Canada would be a smart place to focus your search.

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Sean Williams 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.