Poor Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC). Theyre the two biggest marijuana producers in the world in terms of capacity. Theyve both built major operations in Canada, Europe, and across the world. But neither of the companies can do business in the biggest marijuana market of all — the U.S.
Meanwhile, a couple of Canadian marijuana companies that claim market caps only a fraction of the size of Aurora and Canopy have set up shop in a major way in the U.S. Liberty Health Sciences (NASDAQOTH:LHSIF) and Origin House (NASDAQOTH:ORHOF) arent just doing business in Canadas southern neighbor, theyre both leaders in their respective markets. And they look like better marijuana stocks to buy right now than the big players that cant expand into the huge U.S. market.
You might be wondering why Liberty Health Sciences and Origin House are already in the U.S. while Aurora Cannabis and Canopy Growth can only dream of expanding into the lucrative market. The great divide is a result of the stock exchanges on which each company chose to list its stock.
Aurora Cannabis and Canopy Growth are both listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). The TSX doesnt allow marijuana-related companies listed on the exchange to operate in the U.S. as long as marijuana remains illegal at the federal level. The NYSE has similar restrictions.
However, Liberty Health Sciences and Origin House are listed on the Canadian Securities Exchange (CSE). The CSE doesnt have any problems with marijuana stocks doing business anywhere as long as they provide full disclosure.
So why dont Aurora and Canopy Growth change their listing to the CSE? Its a much smaller exchange than either the TSX or the NYSE. One reason why the market caps of Aurora and Canopy are so much higher than Liberty and Origin House is that their stocks have exposure to more investors.
Trading on the CSE has opened the door for both Liberty Health Sciences and Origin House to thrive in the U.S. market. And theyve done so with very different strategies.
Liberty focuses on the medical marijuana market in Florida. If youre thinking thats a small opportunity, think again. Florida is on track to become the third-largest marijuana market in the U.S., according to Arcview Market Research and BDS Analytics. The Sunshine State should have total marijuana sales of at least $1.7 billion by 2022.
Whats great is that Liberty Health Sciences is one of only 14 licensed medical marijuana businesses in the state. By comparison, Canada has issued over 130 licenses, although some larger companies hold multiple licenses. Florida allows each license holder to operate up to 30 retail dispensaries throughout the state as well.
Liberty currently claims a 15% market share in Florida, according to the companys CEO, George Scorcis. That market share could jump to 25% soon with Liberty boosting its production capacity early next year and opening additional dispensaries.
Origin House set its sights on California. The state is expected to generate $7.7 billion in marijuana sales by 2022. And Origin House is the top distributor of marijuana products in California, delivering more than 130 branded cannabis products to around 70% of the retail dispensaries in the state.
Several of those brands are owned by Origin House itself. The company plans to continue adding additional brands. Origin House hasnt forgotten its roots, though: It acquired 180 Smoke, a leading vape retailer in Canada, in a bid to establish a presence in the countrys recreational marijuana market.
Aurora Cannabis and Canopy Growth eagerly await changes to U.S. federal laws that would open the door to establishing operations in the worlds biggest marijuana market. The recent midterm elections in the U.S. probably increased the likelihood of movement on that front. However, theres still a good chance that it could be years before Aurora or Canopy can expand into the U.S.
Meanwhile, Liberty Health Sciences and Origin House are playing a different kind of waiting game. These two companies look forward to the markets in which they compete growing significantly. This rapid growth looks like a pretty good bet.
But are Liberty Health Sciences and Origin House really better stocks to buy than Aurora Cannabis and Canopy Growth? I think so.
It will take a long time for either Aurora or Canopy to generate enough revenue to justify their high market caps. Liberty Health Sciences, though, could realistically be looking at annual sales of more than $400 million within the next few years. Thats an impressive opportunity considering that Liberty Health Sciences market cap is currently only around $350 million.
Theres a great outlook for Origin House, too. Investment firm Beacon Securities projects that Origin House will make around $325 million in revenue by 2020. The companys current market cap is less than $400 million.
And even if U.S. laws change so that the big Canadian companies can enter the market, Liberty Health Sciences and Origin House should be able to defend their market positions. Aurora Cannabis and Canopy Growth will probably expand to the U.S. sooner or later, but theyll be late to the party. In my view, the biggest winners of the waiting game are the players that dont have to wait.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Origin House. The Motley Fool has a disclosure policy.
Keith began writing for the Fool in 2012 and focuses primarily on healthcare investing topics. His background includes serving in management and consulting for the healthcare technology, health insurance, medical device, and pharmacy benefits management industries. Follow @keithspeights
Licensed cannabis producers are looking to make deals with both legal and black-market small-scale craft growers to add variety to their product offerings for the recreational market.
Since Oct. 17, prospective growers have been able to apply for micro-cultivation licences from Health Canada. The licence limits plant canopy size to 200 square metres, but has less rigorous security rules than the standard cultivation licence. Health Canada says so far, it has received 15 applications under the micro subclass to cultivate or process cannabis.
Even though the first micro cultivation licences arent expected to be issued for many months, established licensed producers have been negotiating with small growers and in some cases have signed supply deals. Some of these small growers are new entrants, while others are currently producing cannabis illegally or are growing under medical licences.
Some within the industry warn that the small growers may be placing themselves at a disadvantage in the long-term with these deals, but the large firms making the agreements emphasize the benefits a big partner can offer.
If you have a micro class licence and youre limited to how much you can produce, it will be difficult to have branding, packaging, a sales team – everything you need to be able to stand out in consumers minds,” says Jordan Sinclair, vice-president of Canopy Growth Corp.
Canopy has a dedicated team focusing on making deals with craft growers, which is also working with them through its venture capital arm Canopy Rivers. Canopy Growth hasnt yet announced any finalized deals, but is negotiating with micro growers while they wait for licensing.
“Its a very competitive space, even early on, so we have a lot of interest from micro growers and prospective micro growers who are wondering how they are going to get their product to market, Mr. Sinclair says. It could be someone coming from the black market who wants to transition over, or it could be someone who used to grow cannabis in the medical system.
The deals Canopy is negotiating are customized, Mr. Sinclair says. A producer could agree to sell a certain percentage of its cannabis at a pre-determined price to Canopy, which could offer financing and support in getting a licence, and handle branding, packaging and distribution. If the cannabis producer already has its own established brand, it could maintain it and use Canopy as one of its distribution channels, Mr. Sinclair says.
Cam Battley, chief corporate officer at Aurora Cannabis, says his company obviously cant be involved in anything outside the legal regulated system, but sees potential to work with micro cultivators that will fall under the new licensed regime.
We are in touch with a large number of people across the industry and we want to see the quality of the product that comes out of the various micro cultivators,” Mr. Battley says. “Well select the very best craft producers and well investigate the possibility to help them develop their market and allow us to provide high quality craft grown cannabis to our patients and customers.
He says that with Aurora on track to produce 150,000 kilograms of cannabis next year, he doesnt need micro cultivators to fulfill the companys supply agreements to distributors.
We dont lack for supply but were always looking for interesting craft-grown products and interesting genetics.
BC Craft Supply Co., a Victoria-based company in the process of becoming licensed, is working primarily with black-market growers looking to go legal. The company has signed up half a dozen growers so far, offering to help them get licensed with Health Canada for an upfront $25,000 fee. The growers agree to give BC Craft Supply first right of refusal on cannabis at market rates.
Bron Hogan from BC Craft Supply says interest from growers is high, but many are holding off for now as they wait for municipalities to determine zoning rules for cannabis facilities so they know where they can legally grow.
Surrey, B.C.-based Zenabis is another licensed producer offering to help growers with regulatory compliance, distribution and financing. The company has six craft growers signed up so far to its Zen Craft Grow program.
Jaclynn Pehota of Vancouvers Althing Consulting says some of these arrangements are good for independent growers, but she advises caution. “The licensing process is new, and theres a lot of fear amongst the micro cultivators. Its a lot of paperwork for people not used to that kind of paperwork, and people think they need someone to do it for them. I have been approached by a lot of folks who are afraid theyre not going to get into legal market any other way, and I dont think thats true.
One medical grower in B.C.s Fraser Valley, James Gallagher, says deals between bigger players and craft growers could have negative repercussions down the road. He worries that if one player comes to dominate the market, it will be able to set prices for the smaller players.
Instead, Mr. Gallagher is looking to create a co-operative with other craft growers, which would allow them to scale up and share costs. Ideally, he says, they will be able to find a property that can be subdivided to allow multiple licensees to operate near each other, and get a standard processing licence to package the cannabis.
By putting a bunch of craft brands together, its going to be a lot stronger and more investible,” he says. “If we move forward with building a processor ourselves, then we get to control our own distribution, and as long as were not tied into any contracts, were more free to do what we wish and set our own price.