Marijuana Stocks: A 4/20 Special

Marijuana stocks (Shutterstock photo)Marijuana stocks (Shutterstock photo)

Today is April 20th. Now, for those readers of a certain age or who have led a somewhat sheltered existence, this means nothing, but many will understand that today, 4/20, is a logical day to talk about one of the fastest growing businesses in the U.S.: Marijuana.

Marijuana is now legal in some way in twenty eight states and the District of Columbia. Eight allow possession and use for recreational purposes, while the remainder permits medical marijuana use with varying degrees of restrictions. Pot is in the process of moving from illicit, underground drug to something more like alcohol in that is accepted, taxed and regulated.

It is little wonder, therefore, that stock in companies in the still immature pot business garner a lot of attention.

Perhaps the best known of them and the largest by market cap is GW Pharmaceuticals (GWPH). GW is actually a British company, and in some ways lumping them in with other marijuana companies is somewhat unfair. As it stands right now, GW’s focus is not really on the cultivation and or supply of marijuana itself. They are, as their name implies, a pharmaceutical company whose platform is based on medicines derived from cannabis plants.

GWPH trades and is ultimately priced in the same way as other pharma companies in that it moves based on the perception of the efficacy and prospects for approval of its drugs rather than the trend towards the broad legalization of cannabis. The fact that those drugs are derived from cannabis adds another factor to the equation, but ultimately the prospects for the company are with the FDA, not the Justice Department.

Following some successful trials they will submit their drug Epidiolex for approval soon, with a decision expected from the FDA early next year. The calculation as to value when it comes to GWPH is therefore just like that of any pharma or biotech company. At the moment they are not profitable, but approval of a small number of therapies with large patient populations can quickly change that.

Biogen (BIIB), for example, has, alongside a couple of partnerships and biosimilars (biotech generics), only seven proprietary therapies in the market but has EBITDA of over $6 billion.

The problem with GW is that the novelty of the pot angle has led to a lot of exposure, and the efficacy of their therapies is well documented. That has led to an assumption that next year will see the approval of Epidiolex and open the floodgates for massive profits. As a result, the risk/reward ratio of GWPH has gotten completely out of whack.

It seems that any potential value of a positive decision is already priced in, and the elevated risk of seeking approval for a drug based on something that is still illegal under Federal law is being ignored. That leaves a relatively small upside and a massive downside to buying the stock here and that is never a good scenario.

Another problem for those looking to invest in the sector is that it is still young and has sprung up from roots in an illegal business. Because of that, other than peripheral bets like GW, there are a limited number of established businesses to invest in. I generally try to avoid illiquid OTC stocks, but that is where you are forced to look in this industry.

In addition, the fact that Jeff Sessions is now in charge at Justice results in a cloud hanging over the prospects for further expansion in the U.S.

The one company that appeals is actually another non-U.S. stock that is available as an ADR, the Canadian company Canopy Growth (TWMJF). The Canadian government under Trudeau is committed to the legalization of recreational cannabis in the country, and while Canopy Growth has to this point been focused on medical applications they are poised to benefit from that change when it arrives. They have been acquiring other companies in the field recently and yet still only posted a loss of a penny per share last quarter.

It is possible that the march of legalization in the U.S. will continue and that the industry will continue to grow, but the current political climate suggests that growth will be at least delayed. Given that and the fact that no clear market leader has emerged in the U.S, looking outside the country for a cannabis investment makes sense right now and Canopy Growth is the obvious choice.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks
Referenced Symbols: GWPH , BIIB

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Martin Tillier

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