3 Top Marijuana Stocks to Watch in October

Sean Williams, Keith Speights, and Todd Campbell, The Motley Fool

The marijuana industry is set to change forever in just five days. That's when Canada will end approximately nine decades of recreational pot prohibition and wave the green flag of licensed dispensary sales. 

There's no doubt that the legalization of marijuana will result in billions of dollars being added annually to Canada's economy. And clearly, these dollars have to flow somewhere. The big question is, what marijuana stocks stand ready to benefit? 

With this in mind, we asked our three marijuana-focused Foolish contributors to sound off on one marijuana stock that you'd be wise to follow during the month of October as we lead into the legalization of recreational cannabis. Interestingly enough, two of the three stocks suggested aren't even going after the Canadian market. 

According to our contributors, California-focused distributor CannaRoyalty (NASDAQOTH: CNNRF), Florida-licensed medical cannabis producer Liberty Health Sciences (NASDAQOTH: LHSIF), and Canadian growing giant Aphria (NASDAQOTH: APHQF) could have investors seeing green in October and beyond.

A bottle filled with dried cannabis buds spilled atop a messy pile of cash.

Image source: Getty Images.

Who needs Canada when you have California

Sean Williams (CannaRoyalty): Rather than fall back on OrganiGram Holdings as my usual marijuana stock of the month to watch, I'd instead encourage investors to pay close attention to CannaRoyalty, which isn't even all that focused on the upcoming Canadian recreational legalization.

Similar to Auxly Cannabis Group, CannaRoyalty got its start as an investment company that angled for royalties. However, that's not where it places its focus today. Instead, it's attempting to become a genuine disruptor in California's burgeoning pot market.

You see, while there are expected to be thousands of products competing for shelf space in hundreds of licensed dispensaries throughout the state, there are a very limited number of distributors within the state that are legally allowed to move cannabis from Point A to B. This places CannaRoyalty in a very advantageous position, assuming it can continue to grow its distribution market share organically, and via acquisition. With limited competition as a result of California's licensing process, the company could generate predictable cash flow and command excellent pricing power.

What often gets lost in the weeds (cue laughter) with Canada's legalization is that California, the fifth-largest economy in the world by GDP, could easily surpass our neighbor to the north in annual cannabis sales. Although estimates vary, as would be expected for an industry with little recreational legalization precedence, I've seen Canada projected at roughly $5 billion in annual sales at its peak, with California closer to $6 billion, if not higher. Ergo, California is actually the more impressive market over the long term, making CannaRoyalty an intriguing pot stock to watch.

A tipped-over bottle with dried cannabis buds spilled atop a doctor's prescription pad.

Image source: Getty Images.

Ringing the bell in Florida

Keith Speights (Liberty Health Sciences): Most investors are focused on Canada's recreational marijuana market opening in a few weeks. But I think there's a marijuana business quietly positioning itself for a big move in a market that receives a lot less hype.

Liberty Health Sciences is one of only 14 licensed medical cannabis companies in Florida. The Sunshine State doesn't get nearly as much attention from marijuana investors as it deserves, in my view. Arcview Market Research and BDS Analytics project that Florida will become the third-largest marijuana market in the U.S. by 2022 with total sales topping $1.7 billion. 

I spoke with Liberty CEO George Scorcis recently. He estimated that the company currently has a market share of around 15% but should realistically increase its share to upwards of 25%. Why such optimism? Scorcis knows that Liberty will have the largest production capacity of any marijuana producer in the state by early next year and will claim 11 dispensaries up and running throughout Florida.

Even if Liberty only maintains its current market share, the company should be able to generate annual sales of well over $255 million within a few years. But the company's market cap currently stands at only around $400 million. In my view, the numbers really add up for Liberty Health Sciences and make this a marijuana stock to definitely keep on your radar screen. 

A vial of cannabis oil next to a cannabis leaf.

Image source: Getty Images.

How investors react to earnings could be telling

Todd Campbell (Aphria Inc.): Investors have focused more attention on its larger Canadian competitors Canopy Growth and Aurora Cannabis, but that might change depending on how investors react to Aphria's latest quarterly results on Oct. 12.

In the past, Aphria's management has said its best-in-class margins could slip as spending increases to take advantage of Canada's recreational market opening this month, and this quarterly update might give investors better insight into just how deeply expenses could cut into its profitability.

It will also show if Aphria's success in driving up demand for high-margin oils and its Broken Coast premium brand is continuing. If so, then those products could help offset some of the company's expected bump up in expenses in the next year.

Additionally, competitors are increasingly listing their shares on the U.S. market exchanges to boost liquidity and gain access to more institutional investors, but Aphria's been quiet on this subject. Perhaps, that will change during its quarterly report. Furthermore, rumors beverage companies are circling its peers have been swirling, so any insight offered up by Aphria on how it plans to tap into that market could be market-moving.

Overall, Aphria's on pace to be the third-largest marijuana producer in Canada next year and historically, its low-cost greenhouse production has given it an advantage. Soon, we may find out if that advantage is likely to continue or disappear.

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Keith Speights has no position in any of the stocks mentioned. Sean Williams has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.