Which Big Canadian Marijuana Stock Has the Most Upside Potential Right Now?

Keith Speights, The Motley Fool

Can the Canadian marijuana stocks with market caps measured in the billions of dollars keep moving higher? Absolutely. It doesn't matter that they have astronomical valuations using traditional metrics. The global cannabis market is growing so rapidly that valuation measurements based on historical sales and earnings should be tossed out the window.

Some big Canadian marijuana stocks should be able to jump much higher and potentially do so more quickly than others, though. Which big Canadian marijuana stock has the most upside potential right now? I think it's none other than Aphria (NYSE: APHA).

Pile of marijuana leaves with one leaf prominently centered on the top.

Image source: Getty Images.

A valuation metric that is relevant

At least for now, capacity is king in Canada. And even when supply catches up to demand in the country, the anticipated global demand should still make production capacity an important criterion in evaluating any marijuana stock.

When it comes to how much production capacity you get per dollar invested, Aphria looks really attractive. The company's Aphria One facility expansion recently received licensing approval from Health Canada. This should enable Aphria to increase its annual production capacity to 115,000 kilograms. With its other expansion efforts, though, Aphria should be on track to produce around 255,000 kilograms of cannabis per year by the end of 2019.

Using this projected capacity and Aphria's current market cap, the stock's market cap-to-capacity projection is a little over $9,800. How does Aphria compare against other big Canadian marijuana producers, including Aurora Cannabis (NYSE: ACB), Canopy Growth (NYSE: CGC), Cronos Group (NASDAQ: CRON), and Tilray (NASDAQ: TLRY)?

Chart of market cap-to-projected production capacity for biggest Canadian marijuana stocks

Data sources: Company reports, Yahoo! Finance.

It's not even a close contest. Aphria is the clear winner on valuation based on projected production capacity.

Competing well in the major markets

It takes more than just ample production capacity to be successful in the cannabis industry. Companies must be competitive in the major markets to have a lot of upside potential. Aphria is competing very well in these markets.

Let's start with the obvious one -- the Canadian adult-use recreational marijuana market. Aphria reported its latest quarterly results in January. Those numbers included a shorter period of sales in the Canadian recreational market than the quarterly updates of its peers. However, based on my analysis of the early data, Aphria appears to be in a solid third place in the key market, behind only Canopy Growth and Aurora.

Aphria secured supply agreements with all 10 Canadian provinces plus the Yukon Territory. It also partnered with Southern Glazer's, the biggest wine and spirits distributor in North America, to distribute its adult-use recreational cannabis products in Canada.

But as important as the Canadian market is, international medical cannabis markets present even greater opportunities for Aphria. And the most significant of these international markets right now is Germany.

Aphria has made two key acquisitions to position it in the German market, first buying Nuuvera then acquiring CC Pharma. Those moves seem to be paying off: Aphria was just awarded provisional approval to cultivate cannabis in Germany. Aphria was one of only three companies to receive this approval, along with Aurora Cannabis and Germany-based Demecan.

Top partnership candidate

Canopy Growth has a big partner in Constellation Brands and received a boatload of cash from the alcoholic beverage maker. Cronos Group benefited from a major investment by tobacco giant Altria. Tilray hasn't had a partner make a big investment, but it has lined up big partnership deals with Anheuser-Busch InBev and Novartis.

So far, Aphria has been left behind in the scramble to find a big partner outside of the cannabis industry. I think that could change, though.

Aphria's board rejected a hostile takeover attempt by U.S.-based cannabis producer Green Growth Brands. But the company definitely seems to be interested in a more attractive deal with a major player. Aphria has also taken some positive steps that should make it more attractive to large partners.

There's no getting around the fact that Aphria's past acquisitions activity has been controversial. Key insiders have profited from some of the company's deals. Although Aphria has denied anything inappropriate, its public image suffered.

Now, however, the company has implemented new governance processes. Aphria has a new independent chairman of the board as well as several independent board members. It's looking for a new CEO to replace Vic Neufeld. In short, Aphria is moving past its past. I think all of these steps will make Aphria much more attractive to a prospective partner.

No. 3 isn't a bad place to be

Will Aphria become the No. 1 Canadian marijuana producer? Probably not. It likely won't claim second place, either. But it doesn't have to be in the top two to be enormously successful.

Aphria's large production capacity and solid market presence in Canada and in key other countries should enable it to capitalize on the tremendous growth in global marijuana markets. These factors, along with its relatively attractive valuation, could make Aphria a top partnership candidate for a major company outside of the cannabis industry.

I don't doubt at all that Aurora, Canopy, and other Canadian marijuana growers with big market caps can continue to deliver solid gains to investors. However, because of its starting point, Aphria just might have the greatest upside potential of them all.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV and Constellation Brands. The Motley Fool has a disclosure policy.