Australia earlier this month joined the growing list of nations that have legalized medical marijuana. And as more countries are added to the list — as well as a smaller number approving or decriminalizing recreational use — many investors see upside remaining in cannabis-related stocks despite a recent rally.
The Marijuana Index is a series of equally weighted stock indexes that track the leading cannabis stocks in the U.S. and Canada.
GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH), with a market cap of $3.34 billion, produces a multiple sclerosis treatment using nabiximols, an herbal preparation containing a defined quantity of specific cannabinoids with potential analgesic activity. Its Sativex is the first cannabis-derived drug that won market approval in any country.
However, in December, GW Pharma and Japan’s Otsuka Pharmaceutical ended their licensing agreement for selling naboximols after the Phase 3 clinical trial studying the treatment of pain in cancer patients did not beat the placebo. But the development of the drug in the hands of only one company may speed up its development. The strong market interest in companies producing cannabis may give GWPH stock a positive lift, too. Already, the stock is up over 40% from yearly lows and closed recently at around $131, close to its yearly high of $140.52.
Valuation Analysis on GW Pharmaceuticals
Though GWPH has little debt, the company does not make any money. It lost 17 cents a share in the third quarter on revenue of just $3.14 million. Until the company has a blockbuster drug on its hands, it will continue bleeding money every quarter. Valuations on GWPH stock are clearly held up on hopes that such a drug will soon be on the market. In its Q3 press release, GW Pharmaceuticals centered its potential with the progress for Epidiolex. Its CEO wrote:
“I am pleased to report the NDA submission process for Epidiolex is now underway with the final sections of the submission expected to be completed in October. With a clear view now towards our anticipated approval, we are making excellent progress with preparations to ensure a highly successful launch in 2018.”
On Dec. 28 the company announced that the FDA accepted Epidiolex for priority review. If approved, the drug will treat patients suffering from one of two epilepsy conditions, Lennox-Gastaut syndrome (LGS) and Dravet syndrome.
Investors may pick AbbVie Inc (NYSE:ABBV), due to its cannabis-based drug Marinol, or Scotts Miracle-Gro Co (NYSE:SMG), since its fertilizers facilitate the growth of marijuana plants. Investing in Johnson & Johnson (NYSE:JNJ) or Amgen Inc. (NASDAQ:AMGN) is another way of getting exposure, not to the marijuana market but the pain relief market. Amgen’s Enbrel drug is an alternative to NSAID-based drugs.
At this point in time, chasing marijuana stocks listed in Canada could prove very risky. Investors jumping now on pot stocks may be too late. As more countries legalize pot, supply will shoot higher, pushing prices lower. This will happen regardless of when or if the U.S. legalizes marijuana, too.
The Canadian marijuana stocks are especially risky. Some stocks are up in the double-digits in just a few months but make no profits at all. Buying into these highly speculative stocks will leave investors with losses if the rally suddenly fades and the market looks for the next hot thing.
In short, the rally in pot stocks is similar to the cryptocurrency craze.
What’s Ahead for Legalized Marijuana?
On Jan. 4, U.S. Attorney General Jeff Sessions reversed an Obama administration policy which enabled states to legalize marijuana without federal intervention. Opposition to the move was fast and furious, coming just days after California expanded cannabis sales to the recreational market, estimated to be worth more than $6 billion a year and generating $1 billion in annual state tax revenue, as the industry grows.
Investors must exercise extra care with companies remotely connected to marijuana. Those stocks may have soared but only those with solid fundamentals will hold those gains.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.