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Pot Stock Marathon: 3 Best Long-Term Buys

Christopher Liew, CFA
Powder of Cannabis (Drugs), Analysis of Cannabis in laboratory.
Powder of Cannabis (Drugs), Analysis of Cannabis in laboratory.

Would the cannabis industry be able to produce weed stocks that you can hold for the long-term? The answer is yes and absolutely. Neptune Wellness (TSX:NEPT)(NASDAQ), HEXO (TSX:HEXO)(NYSE:HEXO), and Aurora Cannabis (TSX:ACB)(NYSE:ACB) could deliver fantastic returns in the long run.

Extraction deals galore

Extraction-service provider Neptune is getting special attention lately. Cannabis companies need the expertise of this $508.6 million company to extract CBD from cannabis and hemp biomass to produce the derivative products.

Neptune would convert extracted cannabis or hemp biomass into cannabinoids, distillates, or resins. The end products would be the high-margin derivative products set to launch in Canada in December.

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In 2018, Neptune signed an agreement with industry giant Canopy Growth to provide extraction and purification services. Health Canada then granted the company the cannabis processing license in early 2019. Last June, The Green Organic Dutchman, and Tilray came calling.

Neptune signed a three-year extraction services agreement with each cannabis producer. The combined total volume of cannabis and hemp for extraction is 355,000 kilograms. With numerous extraction deals, Neptune’s value would further climb in pace with the projected 100% average annual growth of CBD sales through 2023.

Payback time

HEXO is ready to reward shareholders in 2020 and beyond. Next year, the company expects sales to increase by 451.93% to $329.5 million — or even higher.

Likewise, HEXO is pinning its hopes on derivative products that would become available in the market in late 2019. Its 600,000-square-foot facility is ready to process and produce the products. The company signed a two-year extraction deal with Valens GroWorks.

Valens will extract a minimum of 30,000 kilos of cannabis and hemp biomass in the first year. The volume would increase to 50,000 kilograms in the second year. Under the agreement, the processing would be on a fee-for-service basis.

But the most significant catalyst for growth is HEXO’s five-year supply agreement with Quebec. The supply deal in the company’s bailiwick is the most lucrative so far. HEXO will supply the province with 200,000 kilograms of cannabis. Also, HEXO would soon be selling CBD-infused beverages through its joint venture with Molson Coors Brewing.

Leader in all market segments

The marijuana hype is over, and it’s time for the leader to step up to the plate. I’m referring to Aurora Cannabis, not Canopy Growth. This weed stock is arguably the top long-term buy in the cannabis space.

Aurora is leading the way in scaling, growing, and executing. The main thrust is toward medical cannabis, where the profit margin is higher than that of recreational marijuana. Aurora’s fundamentals could significantly improve if it captures a large chunk of the medical marijuana market.

Expect the company to report losses in the next quarter. However, its progress on the operations side is pointing to profitable EBITDA in the succeeding quarters. By early 2020, Aurora would have a production capacity of 625,000 kilograms. The colossal capacity will enable the company to grow sales in various market segments.

You can invest now or wait for Aurora’s next quarterly earnings in mid-September. Either way, this weed stock is poised to hit a home run.

Results, not promises

Neptune, HEXO, and Aurora Cannabis are on track to deliver what investors are hungry for — sales growth and fat bottom lines. Take your pick, but be patient. In due course, these stocks could be the core holdings in anyone’s stock portfolio.

More reading

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing.

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