A Cannabis Stock that Sells the Cheapest Weed
With this past week’s legalization of recreational cannabis in California, Massachusetts, Maine, and Nevada, investors are starting to perk their ears up when it comes to cannabis stocks. With all the historical taboos associated with cannabis, institutional investors are scared to dip their toes in the water here which means good information on this investment theme is lacking. Only the select few like Peter Thiel are stepping up and saying that this is a disruptive investment theme that deserves a closer look. And we all know that Peter Thiel has a successful track record of finding needles in haystacks.
Our past articles warning investors about the inherent dangers of investing in cannabis stocks didn’t go over well with readers so we decided to write about the only cannabis stock that isn’t going to pot. For some reason, people went crazy over that article and it was our single most popular article ever written. Do that many of our readers puff the magic dragon? Or is it just that our lovely readers find this to be such a compelling investment thesis? Finding information on cannabis stocks is very difficult because of all the scams out there so a trustful source of information is needed. You can trust us to separate the buds from the seeds and stems, which brings us to another cannabis stock that should be of interest to investors in cannabis stocks: Aphria (CVE:APH)
In late 2014, Aphria became Canada’s 13th licensed producer and just one year later they had reached cash-flow breakeven. Aphria trades on the TSX Venture Exchange under the ticker APH and also trades on the U.S. over-the-counter(OTC) exchange under the ticker APHQF. In this case, the OTC issue is simply just a mechanism that allows U.S. based investors to buy shares in Aphria in U.S. dollars. The success story of APH is best described in a series of pictures that show just how solid an operation they are running. Here are the investor highlights from their latest annual report:
The first thing to note here is that all of these numbers are in Canadian dollars but that doesn’t really matter. If you really want to see this in USD, just subtract 25% from the numbers (roughly) but that’s not important. What is important is that APH has a gross margin of 75%. This means that for every dollar of cannabis they sell, 75 cents goes into their pocket after costs are subtracted. That is about the sort of margins you would expect for a plant that is pretty much considered a weed, but yet somehow sells for somewhere in the range of $320 USD a pound. We also see that APH has $176 million in cash on hand and that they are selling a lot of cannabis. Read through the annual report and it’s easy to see that they have an experienced management team at the helm that is focused on running the operation like a proper business, not the sort of half baked garbage you see in most OTC companies. Here’s how APH stacks up to their competition:
We can see that APH is taking a disciplined approach to costs as they are operating at twice the efficiency of their nearest competitor. They are able to do this by paying attention to the details and by using greenhouses as opposed to indoor growing operations. Collateral like the following diagram shows just how focused APH is on running a lean operation:
The thesis behind investing in cannabis stocks is quite simple. Along with the proliferation of legalized recreational marijuana comes an entire new market that stands to disrupt the alcohol market but mainly just create an entirely new market. Cannabis is now a commodity, and the producer with the lowest cost will have the highest margins and consequently be better placed to survive and thrive in what looks to be a market that will become very fragmented, very quick. Every stoner out there who became an expert in growing weed in his closet during college now thinks that they can apply for a license and start a legal pot-growing operation to make some money.
You should not try to find the one winning cannabis stock but instead, you should be looking to invest across all legitimate cannabis stocks to benefit from diversification. At this point, the two legitimate stocks on our list are Canopy Growth Corp and APH. In looking at other potential cannabis stocks, we want to see companies that are selling lots of cannabis. We want to see firms that are running their operation as a business that looks at operational metrics like the cost to produce. We want to see cannabis stocks that don’t exhibit signs of being promoted. We want to see seasoned leadership at the helm with experience in scaling businesses. We’re seeing all that with APH and we like how they run their business. This is one cannabis stock that should be part of a diversified holding of cannabis stocks for investors that want to play the cannabis theme.
Is there another legitimate cannabis stock you’re holding that you want us to write about? Drop us a line in the comments section and we’ll go have a look.
Here at Nanalyze, we complement our tech investments with a portfolio of 30 dividend growth stocks that pay us increasing income every year. Learn how to build your own dividend growth stock portfolio in our report on Quantigence - A Dividend Growth Investing Strategy - freely available to Nanalyze Premium subscribers.