These 2 Under-the-Radar Pot Stocks Just Signed the Largest Extraction Deal to Date

Don't blink, because if you do, you might miss the next big deal, organic capacity expansion, or new product unveiling from the fast-paced marijuana industry.

It's not hard to see why Wall Street and investors are so excited about the potential for legal weed. Tens of billions of dollars in cannabis are sold annually on the black market around the world, and if legalization can move even half of these sales (if not more) into legal channels, the pot industry could easily surpass soda in terms of yearly global revenue.

But investing in the quick-changing pot space requires investors to stay on top of the latest news. Last week, we were privy to the largest extraction deal in the history of the legal weed industry. And what's perhaps most striking about this deal is that it was conducted between two marijuana stocks that have largely flown under the radar.

These underfollowed marijuana stocks just struck a massive extraction deal

On Wednesday, June 12, The Green Organic Dutchman (NASDAQOTH: TGODF) announced that it was partnering with Neptune Wellness Solutions (NASDAQ: NEPT) on a three-year extraction deal. This deal will see The Green Organic Dutchman supply Neptune Wellness with an aggregate of 230,000 kilos of hemp and cannabis biomass that Neptune will extract, formulate, and package to create a number of organically developed consumer wellness products. The deal is predominantly back-end loaded, with close to 20% of this extraction coming in the first year, and the remainder expected in the final two years of the deal.

Just how big a win is this for Neptune Wellness? For context, prior to the announcement of Neptune landing an extraction contract with The Green Organic Dutchman, one of the biggest multiyear extraction deals that had been publicized was between HEXO (NYSEMKT: HEXO) and Valens GroWorks (NASDAQOTH: VGWCF). Under the terms of their two-year agreement, HEXO is to supply Valens with at least 30,000 kilos of hemp and cannabis biomass for extraction purposes in the first year, and at least 50,000 kilos in the second year. At worst, this was an 80,000-kilo deal between HEXO and Valens GroWorks. But The Green Organic Dutchman and Neptune Wellness nearly tripled it in size (and added one year in length).

Another reason this deal between two relatively underfollowed pot stocks deserves attention is the growing importance of derivative cannabis products.

Generally speaking, traditional dried flower tends to be a low-margin product. As we've witnessed in select U.S. states where recreational weed is legal, the per-gram price of dried flower has precipitously declined over time. That means growers with little product diversification could be in big trouble. The addition of high-margin marijuana derivatives (e.g., oils, edibles, infused beverages, topicals, vapes, and concentrates), which should be legal by no later than mid-October in Canada, will help to counteract the tight margins of dried flower. And it will act as a dangling carrot for younger cannabis users who have shown a preference for derivatives over dried flower.

This is a big win-win for TGOD and Neptune

Getting back to the deal itself, it's a pretty impressive long-term win for both parties.

The Green Organic Dutchman, or TGOD as it's more affably known, is a late bloomer among growers. At 219,000 kilos of peak annual output, TGOD projects as possibly the fourth- or fifth-largest pot producer, when operating at full capacity. But it's lagging its peers in bringing this production to market, which is a big reason its stock has been hammered harder than most marijuana stocks of late.

However, this is also a company that announced its intentions last year to devote 40,000 kilos of equivalent output to a combination of edibles and cannabis-infused beverages. From the get-go, TGOD plotted a course to ensure that close to 20% of its production would be focused on higher-margin products. Thus, an extraction deal with Neptune furthers the company's efforts to diversify its portfolio and bolster its margins in the wake of its slow start.

Not to mention, TGOD's flagship 1.3-million-square-foot Valleyfield campus in Quebec, which will yield in excess of 100,000 kilos of production a year when fully operational, is relatively close to Neptune's extraction facility, making for supply chain harmony and reduced expenses.

As for Neptune, it really snagged a monster deal that could finally put it on the map. Besides pushing into the U.S. via deals and acquisitions, and signing a three-year deal with Tilray just weeks ago to process up to 125,000 kilos of hemp and cannabis biomass, Neptune has shown Wall Street that it can be a major player in extraction services. Not surprisingly, sales for the company are expected to more than double in 2020 (Wall Street has yet to really factor in the magnitude of its Tilray and TGOD deals), and the company looks to be on track for a profit in 2020.

As we near Health Canada's approval of alternative consumption options, expect dealmaking like this to progress. High-margin derivatives are projected to be at the source of future growth potential for producers like The Green Organic Dutchman, and ancillary players like Neptune Wellness Solutions.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.