Can This Small-Cap Pot Stock Outpace Aphria (TSX:APHA)?

Aphria (TSX:APHA) (NASDAQ:APHA) presents strong growth prospects, but is this small-cap pot stock a better investment?

Aphria’s stock (TSX:APHA) (NYSE:APHA) has soared by more than 50% since the beginning of the year. This performance is due in part to Aphria riding the wave of the stock market, which is currently trending up. But Aphria also has several things going its way.

The Ontario-based firm offers the cheapest stock among the most popular Canadian cannabis companies, and the company’s share price has been affected positively by an aggressive takeover bid from Green Growth Brands Limited.

An argument can be made for the claim that Aphria offers the best value (pound for pound) among the pot stocks on the TSX, but there is another company that deserves to be on your radar. That company is HEXO (TSX:HEXO), a Quebec-based cannabis company. HEXO’s market cap is currently less than Aphria’s, and HEXO’s stock is a few dollars cheaper. Is this small-cap pot stock a better buy than Aphria?

HEXO’s supply agreement

HEXO has largely flown under the radar, at least when compared to other more popular cannabis companies. Despite this relative anonymity, though, HEXO has one advantage over its competitors: the company signed what is currently the largest supply agreement in Canada. Of course, other cannabis providers have managed to land supply agreements.

Cronos Group Inc ((TSX:CRON) (NASDAQ:CRON) has supply agreements with the Ontario Cannabis Retail Corporation, the BC Liquor Distribution Branch, and the Portland-based marijuana oil company Cura Cannabis Solution. Similarly, Canopy Growth Corp (TSX:WEED) (NYSE:CGC) has a supply deal with every province in Canada.

But HEXO’s supply agreement — which the company signed with the relevant authorities in Quebec — will see HEXO deliver 200,000 kilograms of cannabis over five years. This amount dwarfs that of HEXO competitors’ agreements. HEXO seems well positioned to take advantage of the increase in demand for cannabis in the region.

One major flaw

Despite this lucrative deal, HEXO has one major drawback. While many of its competitors have recognized the value of having a significant presence abroad, HEXO is currently lagging behind in that regard. The Canadian pot industry only represents a small percentage of the global cannabis market.

Aphria’s presence abroad is well established. Vic Neufeld, the former CEO of Aphria, once referred to the Ontario-based company as a “global leader in the cannabis industry.” Aphria has a hand in Latin America with plans to expand further. Aphria also has a partnership with Denmark-based Schroll Medical to cultivate organic medical cannabis.

Investor takeaway 

HEXO’s partnership with Quebec will increase the company’s top line. There is one more thing going HEXO’s way. Last year, Molson Coors Brewing announced a partnership with HEXO to produce cannabis-infused beverages. Despite these important growth engines, HEXO is currently far behind some of its rivals in one key area: international presence.

This factor is significant given the potential the cannabis company possesses in many parts of the world. While HEXO is currently an exciting prospect, I would hold off on jumping aboard that ship, at least until HEXO can materialize its promise to go international. At the moment, Aphria still looks like the better buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Prosper Bakiny has no position in the companies mentioned. 

More on Investing

Dividend Stocks

The 2 Best Canadian Blue-Chip Stocks to Buy Now

Blue-chip stocks can be some of the best stocks to have in any portfolio. But when they're trending upwards, investors…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

Lights glow in a cityscape at night.
Investing

Canadian Infrastructure Stocks to Buy Now

These two Canadian infrastructure stocks offer interesting investment opportunities whether you’re focused on income or price appreciation.

Read more »

A plant grows from coins.
Tech Stocks

3 Growth Stocks Wall Street Might Be Sleeping on, But I’m Not

Don’t miss your chance to load up on these three beaten-down stocks.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, November 5

Updates related to the U.S. presidential election will remain on TSX investors’ radar today as the third-quarter corporate earnings season…

Read more »

think thought consider
Tech Stocks

Is CGI Stock a Buy Even With No Dividend Yield?

CGI stock may not have a dividend to speak of. But does that necessarily mean you should ignore this top…

Read more »

A robotic hand interacting with a visual AI touchscreen display.
Tech Stocks

Why Now Is the Time to Invest in Canadian AI Stocks

Are you looking for one of the most solid Canadian AI stocks out there? This one is probably your best…

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

Why AI Stocks Should Be in Every Canadian Investor’s Portfolio

AI stocks continue to be one of the best options out there for long-term investing, especially when considering Canadian options.

Read more »