Before I get to it, let me make a confession: I’m a self-professed marijuana bull. I’ve been bullish on more marijuana stocks than my fellow analysts here. But I call my today’s pick the best of the best for, not one, but exactly seven reasons.
Here’s why this marijuana stock is, hands down, my topmost pick for 2018.
One Marijuana Stock With The Strongest Fundamentals
For starters, this unique marijuana company is actually profitable in an industry crowded by unprofitable sellers. It is a rare gem.
I’ve mentioned before, on numerous occasions, that most marijuana stocks are returning losses to investors. Owning a stake in them may deliver returns in a short-lived bull market, but such an investment will most certainly lose money in the long run.
This marijuana company has delivered profits for the past 11 consecutive quarters and its top line is growing at a high double-digit rate. Its revenue saw a year-over-year growth of 68% in the most recent quarter, while net income was up by a staggering 400% in the same period.
Secondly, although this is a Canadian company, it is the first one to own an American subsidiary.
This company has a very simple formula for expansion. Instead of building a new production facility from scratch, it just goes out there and buys small local producers or invests in them by providing them with seed capital.
That’s exactly how it expanded into the U.S. market, where it bought a 37% stake in a Florida-based company and rebranded it as its subsidiary.
The company is continuing to use the same formula for its local and international expansions. Just yesterday, this company bought a 25% stake in an Australian marijuana company to begin selling its products in the Australian market.
Take note of the timing of this investment. Australia, like Canada, is also setting up for a pot boom. Just last week, the Australian government gave the green light to its local marijuana growers to begin exporting marijuana internationally.
So, with this local partnership, this marijuana company enters the international channel of marijuana trade.
Locally, too, the company is making investments here and there. In the most recent quarter, it invested into two smaller local marijuana companies.
However, the most significant investment of this year may be its latest acquisition of a British Columbia-based marijuana grower, which closed just yesterday.
Following the acquisition, this Ontario-based company will finally have its own distribution network on the West Coast, just weeks ahead of Canada’s legalization day. Mind you, the Canadian government is expected legalize marijuana for adult recreational use by July of this year, after which this nascent industry will bloom.
In addition to setting up these small bases across the country through acquisitions of and investments in smaller marijuana companies, this company has also become the first to have sealed a major deal with Canada’s largest drugstore chain, Shoppers Drug Mart Corporation (TSX:SC).
Under this partnership, the marijuana company is selling its products through the drugstore’s online channel, and will eventually get shelf space at hundreds of Shoppers Drug Mart retail locations across the country. With its products getting more visibility, expect this company to be making even higher sales.
If you haven’t guessed its name by now, then let me reveal it to you. I’m talking about Aphria Inc (TSX:APH), (OTCMKTS:APHQF).
Aphria is Canada’s third-largest marijuana company in terms of market value; it trails the two bigger players, Canopy Growth Corp (TSX:WEED), (OTCMKTS:TWMJF) and Aurora Cannabis Inc. (TSX:ACB), (OTCMKTS:ACBFF). But when you compare their fundamentals, it becomes glaringly obvious that Aphria is undervalued compared to its peers.
Canopy Growth may be the bellwether stock of the marijuana industry, but as we watch it using its resources conservatively and approach maturity, one gets the impression that its high growth days may be over.
Aurora, on the other hand, is growing at a rapid pace. However, its sliding bottom line and ongoing fight with CanniMed Therapeutics Inc., a smaller marijuana company Aurora is looking to buy in a hostile takeover, has us slightly worried now.
Amid this unsettling environment, Aphria has emerged as the most promising growth play for 2018.
This company is literally growing like a weed. Just yesterday, Aphria closed two major expansion deals. Like I mentioned above, the company bought a stake in an Australian company, Althea Company Pty Ltd., at a time when the Australian marijuana market is just taking off. (Source: “Aphria Continues Expansion into Australia with Strategic Investment in Althea Company Pty Ltd.” Business Insider, January 15, 2018.)
The same day, Aphria also acquired B.C.-based marijuana grower Broken Coast Cannabis Inc. The acquisition will add an additional 10,500kg capacity to its annual cannabis production, taking the total to about 230,000kg. (Source: “Aphria Strengthens Portfolio with Acquisition of Leading West Coast Producer Broken Coast,” Aphria Inc, January 15, 2018.)
On top of these developments, Aphria remains one of the lowest-cost producers of marijuana in the industry, boasting some of the highest margins.
In the most recent quarter, it earned more revenue than Canada’s second-largest marijuana company, Aurora Cannabis, making $8.5 million worth of sales. Source: “Aphria Increases Revenue 39% and Kilograms1 Sold 45% in Quarter,” Aphria Inc., January 10, 2018.)
With all these tailwinds working in its favor, there are no second guesses that Aphria stock is the best marijuana stock for 2018.
The stock is up more than 230% in a year, yet appears to be cheap when compared to its peers.
Chart courtesy of TradingView.com
If we go by market capitalization, Aphria takes the third spot on the podium. But its fundamentals tell a different story.
Aphria’s unique moat is its low costs of production. This gives it an advantage to sell its products at a higher margin. The resulting profits are utilized efficiently by management.
Part of these savings are retained for internal expansion and part of these are used to make investments within the industry. This cycle of multiplying profits is continuing therein.
With its strategic investments and profitability numbers working as tailwinds, Aphria stock is well positioned to make a mark in 2018. I reaffirm that Aphria stock is my top pick on the list of best marijuana stocks in 2018.