After a comprehensive look at the Canadian cannabis sector, Canaccord Genuity analyst Neil Maruoka says Aurora Cannabis is his top pick.

Yesterday, Maruoka launched coverage of five marijuana stocks, Canopy Growth Corp. (TSX:CGC), Aphria (TSXV:APH), OrganiGram Holdings (TSXV:OGI), Supreme Pharmaceuticals (CSE:SL), Emblem Corp. (TSXV:EMC). These stocks join Aurora Cannabis (TSX:ACB), which the analyst launched coverage of in 2016. Maruoka has a “Hold” rating and a $12.00 one-year price target on Canopy Growth, a “Hold” rating and one-year target of $6.50 on Aphria, a “Speculative Buy” and $3.25 one-year price target on OrganiGram, a “Speculative Buy” and $2.15 target on Supreme Pharmaceuticals, and a “Speculative Buy” and $3.75 target on Emblem Corp.

Maruoka says he believes existing Licensed Producers have a first-mover advantage because they are presently deploying capital raised into capturing market share, and he says he expects the dominant players will be able to create significant economies of scale. But the analyst cautions that while he thinks the fundamentals remain strong, the valuations may be “stretched” for the larger players in the space. He says valuing individual cannabis stocks presents a unique challenge.

“While we believe that a legal rec market will be in place in Canada in the coming years and that long-term fundamentals remain intact, valuation emerges as a primary issue when we look at individual stocks,” says Maruoka. “If evaluated using traditional metrics, admittedly, valuation of cannabis stocks can be challenging; however, given high barriers to entry, lower regulatory risk, and expected industry capacity expansion, we believe that significant near-term growth should be viewed through a different lens.”

Maruoka developed a scorecard for ranking the five stocks that he says encapsulates his views. The card ranks each of the six Licensed Producers in nine categories: funded capacity expansion, low cost production, high quality product, extract/oil strategy, patent acquisition strategy, marketing/brand strategy, implied return to target, de-risked return, and downside (medical only).

Aurora, notes the analyst scored a neutral in two categories (extract/oil strategy and marketing brand strategy) and a “Strength” in all other areas. It was the only LP without a specific area of weakness.

“Based on our strategic scorecard analysis, and (probably more importantly) a comprehensive valuation methodology, Aurora Cannabis is our Top Pick from this group of LPs,” says Maruoka. “Aurora has the funded capacity to rank amongst the leaders of the industry, and should also be counted amongst the lowest-cost producers once its 100,000 kg Aurora Sky facility is completed. We also believe that Aurora ranks well for the other aspects of its strategy, but also provides a relatively attractive return.”

Maruoka has a “Speculative Buy” rating and one-year price target of $3.15 on Aurora Cannabis. The analyst believes Aurora will post EBITDA of $10.2-million on revenue of $29-million in fiscal 2017. He expects these numbers will improve to EBITDA of $80.2-million on a topline of $192-million in fiscal 2018.