Better Buy: Aphria vs. Canopy Growth

If you’re looking to buy a marijuana stock, Aphria (NYSE:APHA) and Canopy Growth (NYSE:CGC) should probably be on your list for consideration. They’re two of the largest Canadian cannabis producers in terms of production capacity. Both Aphria and Canopy Growth are well positioned in the Canadian adult-use recreational marijuana market and in international medical cannabis markets.

Canopy Growth has been the bigger winner so far this year, with its shares jumping 50% while Aphria has delivered a year-to-date gain of 18%. But which stock is the better pick now?

The case for Aphria

Let’s start by addressing Aphria’s baggage. The company came under attack last year for allegedly overpaying for the acquisition of LATAM Holdings in a transaction that lined the pockets of key insiders. Although a special committee of independent directors on Aphria’s board eventually found that the price paid for the acquisition wasn’t unreasonable, the company identified multiple changes needed to improve its governance. Former CEO Vic Neufeld also stepped down during this period.

The good news for investors looking to buy Aphria now, though, is that the dark cloud hanging over Aphria appears to have disappeared. And the stock’s valuation makes Aphria one of the more attractive bargains (at least, relatively speaking) in the Canadian cannabis industry.

Aphria ranks third among cannabis producers in terms of production capacity. The company expects to produce 255,000 kilograms of cannabis on an annualized basis by the end of this year.

It’s one of only four cannabis producers to secure supply agreements with all 10 Canadian provinces to serve their adult-use recreational marijuana markets. Aphria also partnered with the biggest wine and spirits distributor in North America, Southern Glazer’s, to distribute its products to these markets.

Over the long run, international medical cannabis markets will be even more important than Canada. Aphria has a good start in these markets. It was one of three companies receiving approval to cultivate cannabis in Germany. Aphria also has a presence in nine other international medical cannabis markets.

With its capacity and global operations, Aphria seems likely to be a top candidate for partnering with major companies outside of the cannabis industry. Interim CEO Irwin Simon stated in the company’s Q3 conference call in April that “looking for the right opportunity” to partner with a big U.S. company is a primary focus for the company.

The case for Canopy Growth

Probably the biggest knock against Canopy Growth is that its market cap is much larger than any other cannabis producer. Some might see that as a reason to avoid the stock. Others, though, would say that Canopy’s tremendous market cap is warranted because of the company’s position in the industry.

Canopy Growth claims a strong No. 2 spot in terms of production capacity. It’s also in a close second place in international sales of medical cannabis. But Canopy ranks No. 1 in a couple of categories in addition to market cap.

The company commands a leading market share in Canada’s adult-use recreational market. Like Aphria, Canopy has supply agreements in place with all of the country’s provinces. It could extend its leadership soon once the market opens up later this year for cannabis edibles, beverages, and other derivative products.

Canopy Growth also beats all of its peers with its cash stockpile. Last year, big alcoholic beverage maker Constellation Brands (NYSE: STZ) invested $4 billion, upping its stake in Canopy to 38%. The deal left Canopy with a strong cash position that the company is using to expand its global operations.

That brings us to another area where Canopy arguably ranks first…

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