There are a large number of publicly traded marijuana companies, with the biggest ones being located in Canada — as Canada is the largest market where marijuana has been fully legalized, notes Ben Reynolds, editor of Sure Dividend in a special report on the best opportunities in the cannabis space.

Companies in this segment have different strategies, such as focusing on the medical marijuana market or certain geographic markets.

Most marijuana companies do not have a long history of revenues or earnings because the legal marijuana industry is still in its infancy.

It seems likely that those marijuana companies with the highest sales base and the largest production capacity have the highest chance of generating above-average margins. Reasons for this include economics of scale, operating leverage, and the fact that those with the most experience are likely the best at bringing down costs of production.

On the other hand investors should be careful not to overpay for stocks – which is why the price for a stock should always be looked at relative to metrics such as the earnings or the cash flows that the company generates (on a per-share basis).

As most marijuana companies are not profitable yet, the price to sales ratio can be a good metric to evaluate stocks in this segment. As sales of recreational marijuana are just starting (marijuana was legalized in Canada in October of 2018), the forward price to sales multiple is likely more meaningful than price to sales metrics for 2017 or the trailing twelve month period.

For most marijuana companies there are no sales estimates for 2019 and beyond, which means that we have to derive our own estimates. This is possible due to the fact that these companies publish their production capacity and capacity expansion plans.

We thus looked at the largest producers by production capacity and ranked them based on market value relative to their respective production capacity, which should be a good proxy for a price to sales ratio, assuming that the average price per gram is relatively similar across these companies.

Among the largest marijuana companies by production capacity, here are five with the most promising price per production capacity ratio are analyzed below.

Emerald Health Therapeutics (EMHTF) Emerald Health Therapeutics is one of the smaller marijuana companies in this list, both by production capacity and by market capitalization. The ratio of these two metrics looks very favorable here, though.

The company is one of Canada’s licensed producers, which has been expanding its production capacity through several deals over the last couple of quarters.

A 50/50 joint venture with Village Farms that owns a 1.1 million square foot facility has expanded Emerald Health’s future production capacity substantially. And, the company also acquired Agro-Biotech in 2018.

Together with existing production capacity these deals should allow Emerald Health to produce 100,000 kg of marijuana annually in the foreseeable future. Emerald Health trades at a market cap of $443 million now, which means that investors have to pay just $4,430 per kg of production capacity, one of the lowest ratios among producers.

Emerald Health is not the largest among the Canadian producers, which could be a bit of a headwind as it might lack scale once the industry has matured, but on the other hand this means that Emerald Health is a possible acquisition target in case some of the larger players with more cash on hand want to expand their production capacity further.

The Green Organic Dutchman (TGODF)

The Green Organic Dutchman is an Ontario, Canada, based marijuana company that was IPO’d in spring 2018 and is currently valued at $957 million.

The Green Organic Dutchman expects that its production capacity will be 170,000 kg of marijuana a year, based on several deals that have expanded the company’s asset base during 2018.

This includes the June 2018 acquisition of a facility (280,000 square foot) that The Green Organic Dutchman plans to use for producing marijuana-containing edible products and marijuana-infused beverages.

The Green Organic Dutchman is currently valued at a price of $5,629 per kg of production capacity, which again is one of the better values in the industry.

Organigram (OGRMF)

Organigram is a Moncton, Canada, based marijuana company that is currently valued at $1.075 billion. The company has recently updated investors about its results in fiscal 2018, and on the company’s outlook for fiscal 2019.

The company plans to hit a production capacity of 113,000 kg of marijuana during the coming year, which means that Organigram is being valued at $9,513 per kg of production capacity right now.

Organigram has made a lot of progress in bringing down its production costs, those declined from $2.65 per gram in Q1 2018 to $0.83 per gram in Q4 2018. This massive success in reducing its costs bodes well for Organigram’s margin profile and its potential for generating profits in the future.

CannTrust Holdings (CTST)

CannTrust Holdings has, like most of its peers, not been around for a long time; the company was founded just 3 years ago. CannTrust Holdings is based in Vaughan, Canada, and currently trades with a market capitalization of $1.011 billion.

The company expects that its production capacity will be 100,000 kg or more once its Niagara facility has come on line. CannTrust has begun construction of additional growing facilities, including a 600,000 square foot facility on unused land next to an already existing asset (Perpetual Harvest Facility), although it will take some time for this facility to begin production.

When we use the low end of management’s production guidance, CannTrust trades at a price of $10,110 per kg of production capacity.

Aphria (APHA)

Aphria is substantially larger than the peers in this list. The company is currently valued at $2.46 billion. The company is one of the global players in the marijuana industry, as it does not only operate in North America, but also in several other countries around the globe.

Aphria has a production capacity of 255,000 kg of marijuana a year, which makes it the third biggest producer. Its two biggest facilities, Aphria One and Aphria Diamond, have production capacities of 110,000 kg and 140,000 kg annually, respectively.

In terms of price per production capacity, Aphria trades at $9,647 per kg of capacity right now. Some analysts still see Aphria as a potential takeover candidate.

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