Canada markets closed

3 Marijuana Penny Stocks That Are Actually Major Players

Sean Williams, The Motley Fool

A decade from now, investors may very well look back and proclaim the cannabis industry to be the greatest growth opportunity of our generation. We know the demand is there given the tens of billions of dollars that exchanges hands in illicit channels each year. It's simply a matter of ongoing legalizations and ramp-up efforts to move those black-market pot sales into legal channels. If this happens, $75 billion in annual sales by 2030 is easily achievable, according to one Wall Street firm.

But what you may not realize is that while many of the major legal players have billion-dollar market caps, not all of them fit the mold of what you'd think a major cannabis company would look like. Right now, there are three marijuana penny stocks that are expected to be very important players in the Canadian pot industry.

An up-close view of a flowering cannabis plant growing indoors.

Image source: Getty Images.

Auxly Cannabis Group

Auxly Cannabis Group's (NASDAQOTH: CBWTF) market cap of $355 million, as of closing on Wednesday, July 3, is hardly pedestrian. However, its $0.60 share price (that's 60 cents), doesn't exactly fit the definition of a company you'd expect to be a leader in the cannabis space. But rest assured, Auxly may very well be the real deal.

Until roughly the midpoint of 2018, Auxly Cannabis Group was entirely focused on operating as a royalty company. Much in the same way precious-metal royalty companies forward cash to their licensing partners in exchange for mined metals at a below-market cost, Auxly was providing cash to growers in exchange for future cannabis production at a below-market cost. This would allow the company to then sell this product, or a derivative of dried flower (e.g., oils, edibles, infused beverages, topicals, and so on), at the full market rate, thereby pocketing the difference as profit.

Auxly changed its approach a bit about a year ago, primarily because the royalty model didn't allow Auxly much wiggle room on lowering its costs, and also because it'll further assist the company in controlling its supply. It still has deals with more than a dozen licensed producers, but now also has a joint venture and wholly owned grow projects in its portfolio. All told, Auxly will control -- and by control, I mean bring to market via its licensing partners, joint ventures, and wholly owned farms -- about 170,000 kilos a year. There are, perhaps, only five or six individual pot growers with a larger marijuana retail presence in Canada.

There are two reasons Auxly's stock has received little love from investors. First, it's been issuing a lot of stock to raise money to fund its licensing deals and wholly owned cultivation expansion. These share issuances tend to be dilutive to existing shareholders.

Secondly, the company has made clear that it's holding back dried flower sales in the near-term in favor of bringing higher-margin derivative products to market later this year. Derivatives will begin hitting Canadian dispensary shelves by no earlier than mid-December. While a long-term positive for Auxly, this wait has been hurting the company's near-term operating results.

Despite its minuscule share price, Auxly has the makings of a major Canadian marijuana company.

A dollar sign shadow being cast atop a pile of cannabis leaves.

Image source: Getty Images.

Zenabis Global

As of this past Wednesday, a share of Zenabis Global (NASDAQOTH: ZBISF) could be had for a mere $1.45, which is the type of pocket change we likely have hanging around in our couch cushions. But as with Auxly, you can't judge a book by its cover.

Zenabis, which sports a respectable $288 million market cap, currently slots in as one of the 10 largest individual growers in Canada. According to an investor presentation from the company, Zenabis Global expects to be producing 131,300 kilos on an annual run-rate basis by sometime in August 2019. Most of this production will come from the maxing out production at the company's Atholville campus in New Brunswick (34,300 kilos), and from the expansion of what will be its flagship Langley campus in British Columbia (96,100 kilos).

What's truly remarkable about Zenabis Global is that this could be just the beginning of its annual output. The Langley campus sits on a 2.1-million-square-foot parcel of land that, if built out, could accommodate up to 426,000 kilos of annual output, according to company estimates. That puts Zenabis on track for more than 479,000 kilos of peak capacity, if it chose to fully develop its Langley campus. Plus, with the company recently announcing that initial output has topped design capacity by a double-digit percentage in four of the first five months of 2019 (January-May), these robust production estimates may prove conservative. 

On top of substantial production, Zenabis also has two processing facilities that, when in full use, have 183,600 kilos of annual extraction capacity. Since derivatives are expected to play such an important role in Canada's marijuana industry growth, the company's clear focus on portfolio diversification should be a positive for its operating margins.

Clearly, Zenabis has quite a bit of work to do in terms of branding and building a name for itself in a crowded industry. But a wholesale supply deal worth almost $23 million that was announced this past week with Tilray is a good start. It's certainly a name for investors to monitor.

A physician with a stethoscope around his neck holding a baggie of cannabis in his left hand, and cannabis oil capsules in his right hand.

Image source: Getty Images.

Aleafia Health

Another pot stock that may not look like much on the surface, but is actually a big-time player, is Aleafia Health (NASDAQOTH: ALEAF). Aleafia closed this past Wednesday with a share price of $1.01 and a market cap of $265 million.

Earlier this year, Aleafia completed a transformative acquisition that saw it purchase Emblem in an all-stock deal. What made this merger so interesting is just how similar the business models of these two companies were prior to their combination. Both ran health and wellness clinics, as well as operated their own cannabis cultivation farms.

The idea behind the clinic model is that it allows a company to prescribe medical marijuana to patients who may benefit from it, then (hopefully) keep those patients within the network by selling them in-house-branded pot products. Even though recreational weed is a far larger market than medical marijuana, medical patients tend to use cannabis more frequently, buy it more often, and are far more likely than adult-use consumers to buy high-margin derivatives. That makes medical patients a prized commodity, even with recreational pot legalized in Canada.

Since combining their two businesses, the new Aleafia Health has around 40 health and wellness clinics, and the ability to produce 138,000 kilos of cannabis a year, when at full operating capacity (98,000 kilos from Aleafia and 40,000 kilos from Emblem). Like Zenabis, this 138,000 kilos places Aleafia Health among the top-10 growers in Canada.

The big question mark is how Aleafia Health will move so much weed when its focus has predominantly been on medical patients. The company did recently secure a permit from Health Canada to export cannabis products, including high-margin oils, to Australia, but will likely need significant supply deals in Canada, and throughout Europe, if it's to avoid pressure on its margins. Nevertheless, like the other marijuana penny stocks here, it's worth a closer inspection.

More From The Motley Fool

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Auxly Cannabis Group. The Motley Fool has a disclosure policy.

  • The Latest: WHO warns Brazil against reopening its economy
    Finance
    The Canadian Press

    The Latest: WHO warns Brazil against reopening its economy

    The Latest on the coronavirus pandemic. The new coronavirus causes mild or moderate symptoms for most people. For some, especially older adults and people with existing health problems, it can cause more severe illness or death.TOP OF THE HOUR:— World Health Organization warns Brazil against reopening

  • Use pandemic to stop brain drain, MPs told, as payments for CERB top $40 billion
    Finance
    The Canadian Press

    Use pandemic to stop brain drain, MPs told, as payments for CERB top $40 billion

    OTTAWA — The federal government should use the COVID-19 pandemic to reverse a brain drain of top tech talent south of the border, a House of Commons committee heard Monday, alongside warnings that companies would leave Canada if taxes go up to pay for massive deficits.The pandemic-related economic crisis

  • Finance
    The Canadian Press

    Most actively traded companies on the TSX

    TORONTO — Some of the most active companies traded Monday on the Toronto Stock Exchange:Toronto Stock Exchange (15,089.08, up 161.78 points.)HEXO Corp. (TSX:HEXO). Health care. Up 21 cents, or 23.86 per cent, to $1.09 cents on 22.3 million shares.The Green Organic Dutchman Holdings. (TSX:TGOD). Health

  • Stocks Climb With U.S. Futures; Dollar Steady: Markets Wrap
    Finance
    Bloomberg

    Stocks Climb With U.S. Futures; Dollar Steady: Markets Wrap

    (Bloomberg) -- Stocks in Europe and Asia gained along with American equity-index futures as investors weighed more signs of economies reopening around the world against the rise in U.S.-China tensions. The dollar was steady, and crude oil added to last week’s strong advance.Construction and industrial-goods

  • U.S. Cases Inch Up; California Sets Church Limits: Virus Update
    Finance
    Bloomberg

    U.S. Cases Inch Up; California Sets Church Limits: Virus Update

    (Bloomberg) -- The daily rise is U.S. cases trailed the weekly average for a third straight day as coronavirus deaths inched closer to 100,000. Novavax Inc. started human tests of its coronavirus vaccine candidate.California is limiting attendance at church services to 100 people, and discouraging choir

  • Air Canada CEO's compensation cut by more than half to $5.8M due to COVID-19
    Finance
    The Canadian Press

    Air Canada CEO's compensation cut by more than half to $5.8M due to COVID-19

    MONTREAL — Air Canada CEO Calin Rovinescu was on track to receive around $12.9 million in total compensation last year, but the value fell by more than half as the airline's shares stalled due to the COVID-19 pandemic.As of May 4, when the company's share price closed at $17.63 on the Toronto

  • Pandemic brings smaller, subdued Memorial Day observances
    Finance
    The Canadian Press

    Pandemic brings smaller, subdued Memorial Day observances

    BILLINGS, Mont. — Americans settled for small processions and online tributes instead of parades Monday as they observed Memorial Day in the shadow of the pandemic, which forced communities to honour the nation’s military dead with modest, more subdued ceremonies that also remembered those lost to the

  • Ontario used auto dealers expect tough year ahead, prices already down
    Finance
    The Canadian Press

    Ontario used auto dealers expect tough year ahead, prices already down

    TORONTO — Used car dealers in Ontario are starting to recover from the near total shutdown in April, but a survey released Monday suggests they expect sales and prices to be under pressure for the year as economic uncertainty clouds the market.The sector was, like much of the economy, thrown into turmoil

  • Toronto stock market rally led by cannabis while U.S. stock markets closed
    Finance
    The Canadian Press

    Toronto stock market rally led by cannabis while U.S. stock markets closed

    TORONTO — Canada's main stock index posted a triple-digit advance to start the trading week on a broad-based rally led by a resurgence among cannabis stocks."Even though they don't make up as big a part of the market as they used to, they're having a real surge today," said Michael

  • Brazil Toughens Rules to Avoid U.S.-Style Disruptions
    Finance
    Bloomberg

    Brazil Toughens Rules to Avoid U.S.-Style Disruptions

    (Bloomberg) -- Brazil, the biggest exporter of beef and chicken, is betting on a new set of safety standards to avoid the kind of mass processing disruptions that caused meat shortages and price spikes in America.The South American farming giant plans to introduce new national guidelines that incorporate

  • Finance
    The Canadian Press

    Branson's Virgin Orbit fails on first rocket launch attempt

    LOS ANGELES — Richard Branson's Virgin Orbit failed Monday on its first attempt to launch a test satellite into space aboard a rocket carried aloft by a Boeing 747 and released over the Pacific Ocean off the coast of Southern California.The inaugural launch had appeared to be going well until moments

  • No mask, no service? Businesses have the right to require masks on customers
    Finance
    The Canadian Press

    No mask, no service? Businesses have the right to require masks on customers

    TORONTO — If you were hoping to get out of putting on a face mask to visit stores and other businesses demanding customers wear one, think again.Experts agree with remarks Ontario Premier Doug Ford made on Friday, reminding Canadians that companies have the right to ask you to slip on a face covering

  • Finance
    The Canadian Press

    Five business groups urge Ontario to halt commercial evictions during pandemic

    TORONTO — Five business groups called on the Ontario government on Monday to impose a commercial eviction moratorium during the COVID-19 pandemic, warning that many small and medium-sized businesses are at risk of closing.The groups make the request in an open letter to Premier Doug Ford, saying the

  • Finance
    Bloomberg

    New Bank of Canada Governor Faces Stagflation, Rosenberg Says

    (Bloomberg) -- Incoming Bank of Canada Governor Tiff Macklem will face a combination of rising prices and stagnant growth as the economy struggles to recover from the coronavirus pandemic.That’s the forecast from Canadian economist David Rosenberg, who sees prices increasing as consumers feel comfortable

  • California issues guidelines for church reopenings
    Finance
    The Canadian Press

    California issues guidelines for church reopenings

    LOS ANGELES — California churches can resume in-person services but worshippers will be limited to 100 people and they should wear masks, avoid sharing prayer books and skip the collection plate under state guidelines released Monday.The California Department of Public Health released a framework under

  • Transat extends Air Canada takeover timing following European regulatory review
    Finance
    The Canadian Press

    Transat extends Air Canada takeover timing following European regulatory review

    TORONTO — Transat AT has extended the timing of its acquisition by Air Canada after European regulators launched an in-depth investigation into the deal over concerns it may reduce competition and result in higher prices.The Montreal-based tour company that owns Air Transat said it informed Air Canada

  • French nursing homes employees protest pay, conditions
    Finance
    The Canadian Press

    French nursing homes employees protest pay, conditions

    PARIS — Employees of a major group of French nursing homes on Monday took part in protests across France to call for better pay amid the coronavirus crisis.Protesters gathered outside homes owned by the Korian group in Paris, Lille and other French cities in response to a call from several far-left unions.The

  • Finance
    Bloomberg

    Air Canada’s Bid for Transat Gets Extended EU Merger Probe

    (Bloomberg) -- Air Canada’s bid for tour operator Transat A.T. Inc. faces an extended probe from European Union regulators who said the deal may hamper competition by combining the two biggest airlines linking Europe and Canada.The European Commission set a Sept. 30 deadline to rule on the deal, citing

  • Sanofi to Sell Regeneron Stake Worth About $13 Billion
    Finance
    Bloomberg

    Sanofi to Sell Regeneron Stake Worth About $13 Billion

    (Bloomberg) -- Sanofi is selling a stake in Regeneron Pharmaceuticals Inc. valued at about $13 billion, giving the French drug giant more firepower to invest in fast-growing fields such as cancer.Regeneron has agreed to repurchase $5 billion of its stock from Paris-based Sanofi, the companies said on

  •  Upcoming bank loan loss provisions won’t be ‘fireworks’, but will have a long-lasting impact
    Finance
    Yahoo Finance Canada

     Upcoming bank loan loss provisions won’t be ‘fireworks’, but will have a long-lasting impact

    The magnitude of the loan losses will likely come from years of Canadians relying on debt, fuelled by a run-up in real estate values, allowing people to borrow against the value of their home.

  • Gucci, Saint Laurent seek radical redo of fashion calendars
    Finance
    The Canadian Press

    Gucci, Saint Laurent seek radical redo of fashion calendars

    SOAVE, Italy — Gucci and Saint Laurent are two of the highest profile luxury fashion houses to announce they will leave the fashion calendar behind, with its relentless four-times-a-year rhythm, shuttling cadres of fashionistas between global capitals where they squeeze shoulder-to-shoulder around runways

  • German court ruling clears the way to settle VW diesel cases
    Finance
    The Canadian Press

    German court ruling clears the way to settle VW diesel cases

    KARLSRUHE, Germany — A German court has ruled that Volkswagen must buy back cars from owners of its diesel cars equipped with software that evaded emissions testing — but consumers must accept the current value of the car based on the mileage they drove since buying it, not the purchase price.Volkswagen

  • UK leader's aide says he won't quit over lockdown road trip
    Finance
    The Canadian Press

    UK leader's aide says he won't quit over lockdown road trip

    LONDON — British leader Boris Johnson’s powerful chief aide insisted Monday that he wouldn't resign for driving the length of England while the country was under strict lockdown — a trip he made without informing the prime minister first.The government is facing a tide of anger from politicians and

  • Canada Revenue Agency extends some trust and corporate filing deadlines
    Finance
    The Canadian Press

    Canada Revenue Agency extends some trust and corporate filing deadlines

    OTTAWA — The Canada Revenue Agency is extending some of the filing deadlines for corporations and trusts in a move to help businesses and tax preparers dealing with the COVID-19 pandemic.The agency says it will allow businesses to defer T2 corporation income tax returns otherwise due in June, July or

  • Liberal offer on sick leave good start, but action needed: NDP
    Finance
    The Canadian Press

    Liberal offer on sick leave good start, but action needed: NDP

    OTTAWA — Jagmeet Singh says Prime Minister Justin Trudeau's promise to work with provinces to give workers paid sick leave is a good start, but more action is needed before federal New Democrats will agree to suspend full sittings of the House of Commons through the summer.The back and forth over