Cannabis stocks in Canada are poised to surge with the recent announcement that adult use of marijuana will be legal in that country starting in October, which will encourage more investments this budding sector.

Recreational use of cannabis has been legalized in Canada with sales starting on Oct. 17, which will be met with enthusiasm from not only the public, but also investors and marijuana companies.

Investments in both public and private companies are expected to multiply as one company recently went public and the country's more favorable regulations allow U.S. companies to list on their exchanges.

"It's a really exciting time as an investor," says Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor. "Weed is to Canada what Silicon Valley is to the U.S. We will see a lot more money flowing in."

The marijuana market in Canada is growing rapidly each year as more companies become public. The Green Organic Dutchman, an organic cannabis producer, began trading in May on the Toronto Stock Exchange under the ticker TGOD and raised 132.26 million Canadian dollars ($101 million) from its IPO.

"We are a pretty unique company and the leader in the western world since America has not approved cannabis federally," says Rob Anderson, the company's former CEO. "Our government embraces us and we are seeing a boom in entrepreneurism in this industry."

The Green Organic Dutchman began construction of four facilities with a total capacity of 195,000 kilograms in Canada, Europe and the Caribbean. The grower also plans to build a 40,000-square-foot research and development center, which will have space to develop new products such as cannabinoid-infused beverages.

Aurora Cannabis, one of the largest licensed medical cannabis producers in Canada, holds a 17.6 percent stake in TGOD and has invested CA$78 million to date. This partnership is strategic because it will give the company a larger footprint, Spatafora says.

One of the largest costs in producing marijuana is paying for expenses such as water and lighting. What sets TGOD aside from its competitors is that the company is paying a fraction of the costs on electricity. Its partnership with Hamilton Utility Corp. means its power cost have been reduced from 13 cents per kilowatt hour to less than 5 cents at its Hamilton, Ontario, facility.

Waiting to go public is often beneficial for companies so they can build their cash flow and revenue.

"TGOD went public with everything they needed to do – they were fully funded and have a big cash reserve of $300 million," Spatafora says. "They held their valuation on their IPO and it has nearly doubled since then."

Since the company is getting power at a 75 percent discount compared to other producers by partnering with Eaton Corp. (ticker: ETN) for their automation and recycling and are paying less than 4 cents per kilowatt hour at its Quebec facility, it makes TGOD "very attractive," Spatafora says.

The company's stock has a lot of upside. Out of 100 licensed producers in Canada, TGOD is one of two which are certified organic.

"Organic demands a premium price," Spatafora says. "TGOD also was smart in controlling its expenses early and they have they have the lowest cost in production in Canada, which adds to the bottom line and overall margin."

Other major cannabis stocks to buy. Since Canada is set to legalize the recreational use of cannabis, companies which are not funded well or have a good management team will likely fall by the wayside, Spatafora says. The smaller companies, which are planning to get approvals for licenses, will be at a disadvantage.

"The public ones that are micro versions of the larger ones and are carrying debt and do not have licenses will get hurt because there will be a consolidation in the market," he says.

Investors should seek cannabis stocks whose companies have been producing for years, expanded their operations into other countries and are well-capitalized.

Aurora Cannabis has a funded capacity of 430,000 kilograms per year and operations across Canada and in Europe because it has made good investments in addition to TGOD, Spatafora says.

The company announced on June 26 a CA$200 million debt facility with a potential upsize to CA$250 million with the Bank of Montreal, which gives it the ability to expand. Aurora currently owns stakes in several companies – a 25 percent ownership interest in Alcanna, western Canada's largest private retail chain of liquor stores, which is developing a cannabis retail network; a 17 percent stake of the issued shares in extraction technology company Radient Technologies; a 52.7 percent of Hempco Food and Fiber; a 22.9 percent stake in Cann Group Limited, the first Australian company licensed to conduct research and cultivate medical cannabis; and a 9.14 percent stake in CTT Pharmaceutical, a Canadian cannabis product development company.

"They have a global reach like Canopy Growth and have the second-biggest footprint in Canada," Spatafora says.

Canopy Growth (CGC), which operates 10 cannabis production sites with more than 2.4 million square feet of production capacity and has operations in nine countries, is an another good investment opportunity, Spatafora says. The company reported revenue in the fiscal year ended March 31 of CA$77.9 million, a 95 percent increase over the prior year and has CA$323 million cash on hand.

"Next to Aurora they are the best company set up for legalizing recreational weed," he says. "They have a lot of first-mover advantages and were spending money investing at the right time. Some other good companies are Aphria, which has a lot of cash flow also, and OrganiGram Holdings."

Companies able to pivot and expand into the beverage, edibles and pharmaceutical industries will be the winners, Spatafora says.

Another cannabis company which went public this year is Choom Holdings, says Michael Berger, founder of Technical420, a Miami-based company that conducts research on cannabis stocks.

Choom Holdings has applications pending in three Canadian provinces to open up to 51 retail outlets, is focused on securing strategic partners and supply agreements to develop and acquire strategic licenses and production assets to meet the demand from the recreational market.

Choom sold an 8 percent stake to Aurora in June for CA$7 million and has secured rights to 17 retail leases in Alberta, and has seven leases secured in British Columbia.

"Choom is attractively valued and is significantly undervalued, creating an exciting opportunity for long-term investors," he says.

Last month, LiveWell Canada went public on the TSX Venture exchange and has an attractive partnership with Canopy Rivers, which is going public soon, Berger says.