3 Best Canadian Penny Pot Stocks for the Rest of 2018

canada penny pot stocks
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Canadian Pot Stocks

Five years ago, no one would have guessed that marijuana would become the hottest sector of the stock market (aliens landing on the moon would have been more likely).

However, now that we’ve seen Canadian pot stocks rise by 200% and 300%, there’s no denying that pot penny stocks are a force to be reckoned with.

We should note, though, that the first generation of marijuana stocks have already skyrocketed.

Shares of Canopy Growth Corp (NYSE:CGC), Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB), and Aphria Inc (OTCMKTS:APHQF, TSE:APH) are trading several hundred points above their initial public offering (IPO) prices.

Their best days are past, and although investors can still squeeze more juice out of them, marijuana penny stocks offer greater upside potential.

The second wave is coming…

However, given the sheer number of marijuana IPOs taking place—particularly on the Canadian Securities Exchange (CSE)—investors might have a hard time sorting the wheat from the chaff.

Lucky for you, we’ve put together a list of three of the best Canadian pot penny stocks for 2018.

Best Penny Stocks for 2018

Rather than listing a bunch of generic weed stocks, I chose ones with competitive advantages. They all have something unique that becomes more and more valuable as the market moves to scale.

I expect these marijuana penny stocks will quickly outgrow the name, though, so I’ve included the price they were trading at during the time of writing.

1. Hydropothecary Corp

Price: $3.22

At first glance, Hydropothecary Corp (OTCMKTS:HYYDF, TSE:HEXO) is a small marijuana producer in Canada. But it’s got an ace up its sleeve—a gigantic sales contract with the Quebec government that guarantees lots of revenue for the next five years. (Source: “Hydropothecary reports fiscal 2018 third quarter results,” GlobeNewswire, June 28, 2018.)

“In the past quarter, we finalized a long-term supply contract as the preferred supplier to the Société québecoise du cannabis (SQDC) for approximately 200,000 kg of cannabis, over a five-year period,” said CEO and co-founder Sebastien St-Louis.

“This gives us the second highest recreational revenue certainty among licensed producers for the first year of the adult-use market in Canada, with 20 metric tons committed, representing 35% of the Quebec adult recreational market.”

This contract is a big deal for Hydropothecary stock. After all, Quebec is the second-biggest province in Canada with regards to population, so a foothold there goes a long way to crafting a national presence.

Also, Quebec is something like a miniature country. French is the primary language there and its regulations are often different from those in the rest of Canada. As a result, Hydropothecary’s local status gives it a leg up on the competition.

We think there is hidden value in this stock. It hasn’t seen the kind of growth that Canopy or Aphria have, meaning investors who scoop it up now could score triple-digit gains.

2. MedMen Enterprises Inc

Price: $3.38

If you’ve heard analysts reference the “Apple Store of pot,” they were probably talking about MedMen Enterprises Inc (OTCMKTS:MMNFF, CNSX:MMEN). Its brick-and-mortar locations are famous for clean, minimalist aesthetics that welcome first-time pot smokers into the fold.

However, the company was privately run until recently. It only entered the market earlier this year through a financial backdoor known as a reverse takeover.

The reason it chose to list on the Canadian Securities Exchange, though, is because the U.S. government’s reluctance to legalize marijuana has kept banks at a distance.

The upsides are clear: it’s cheaper and less onerous than filing for an IPO. That said, it’s far less transparent. You could reasonably argue that this lack of transparency explains why the stock traded sideways in June and July. Or maybe it was the firm’s exorbitant administrative costs.

In any case, we think MedMen stock could rebound by opening stores across Canada and the United States. If those outlets diminish the public’s stigma against weed, we could see MedMen become a leading brand and leverage that accessibility into a high-end slice of the market.

Bottom line: Don’t underestimate the power of branding.

3. CannaRoyalty Corp

Price: $3.42

In May, I reported that CannaRoyalty Corp (OTCMKTS:CNNRF, CNSX:CRZ) was surviving the brief downturn better than most marijuana stocks. The company played defense well. Now, however, I want to see if this stock can get aggressive on the other end.

At $3.42, it is still trading quite cheap. I personally think that’s because most investors don’t understand what the company does or what makes it unique. CannaRoyalty is not just a simple marijuana producer. In fact, it never even touches the plant.

The truth is that it’s a private equity firm specializing in pot. It gives money to promising marijuana startups in exchange for future profits that are passed through to shareholders.

And since there are multiple projects involved, investment risk is fundamentally lower than with other recreational marijuana stocks.

This private equity model—sometimes known as a “streaming” model—has worked to great success in the mining business. It can provide epic returns.

Although the company’s financials are a little messy (since last year’s fiscal year was truncated), the firm made a few smart investments to propel its share price.

Two of its new subsidiaries—Alta Supply Inc. and River Distribution—are establishing a logistics network in California, which, for those who don’t know, is the largest recreational marijuana market on the planet. (Source: “Management’s Discussion and Analysis of the Financial Condition and Results of Operations for the Twelve Months Ended December 31, 2017,” CannaRoyalty Corp, April 3, 2018.)

The firm’s revenues attributable to California hit a monthly high recently, suggesting that legal pot sales are taking off in the Golden State.

What could help that revenue growth is the acquisition FloraCal Farms, an ultra-premium marijuana seller that commands exorbitantly high prices. (Source: “CannaRoyalty to Acquire 100% of California Licensed Producer FloraCal Farms, an Ultra-Premium Craft Cannabis Company,” CannaRoyalty Corp, April 18, 2018.)

CannaRoyalty’s business appears to be moving in the right direction, so it’s only a matter of time before its share price follows suit.

Analyst Take

Right now, these stocks don’t look like star performers. They look like the B team, the junior varsity squad, the leftovers. But don’t let that fool you. Investing is about seeing value where others don’t.

Remember that in the short run, the stock market is a popularity contest. In the long run, it’s a weighing scale.