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Do the Risks in Marijuana Stocks Outweigh the Rewards?

marijuana stocks - Do the Risks in Marijuana Stocks Outweigh the Rewards?

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Marijuana stocks are hot now, as is the social and political climate around them.

But true investors know that if you’re going to be a successful investor you have to be able to spot objective opportunities and not be pulled by emotional or political feelings.

Few issues exemplify this more than the new wave of cannabis legislation sweeping the country.

At this point, recreational marijuana is legal in nine states and medical marijuana is legal in 30. That’s 60% of the U.S. states that see some reason to legalize marijuana. And cannabidiol (CBD) a non-psychoactive ingredient found in marijuana is legal in 17 states to treat children with epilepsy or severe seizures.

Canada has also legalized recreational marijuana and it has some of the most mature cannabis companies in North America.

Because the U.S. is still a patchwork of states that allow limited, full or no use of legal cannabis, it’s a challenge for an industry — and by extension marijuana stocks — to truly develop. What you have is companies that have moved into the most open cannabis markets to establish themselves in the hopes of being able to scale up their business nationally, when the time comes.

Like many other “next big thing” stocks — think dotcoms, blockchain or nanotechnology — it’s certainly true there are significant opportunities. But there are also significant risks this early in the business cycle.

For example, there is still a very real issue about how financial institutions can get involved in this business without running afoul of federal and state laws. Cash management is a significant issue for this industry, even as it grows by leaps and bounds.

Usually thousands of companies launch, but over time they either wither or are overtaken by larger, better-financed and better-managed companies. We’re still in this “let a 1,000 flowers bloom” stage of this market sector and marijuana stocks in general.

And we will be in that stage for some time.

That’s not to say there aren’t companies getting national recognition at this point.

Marijuana Stocks That Are Worth a Look

For example, GW Pharmaceuticals (NASDAQ:GWPH) is a U.K.-based company that develops novel therapeutics using cannabinoid derivatives. It’s basically a biotech that is building pharmaceuticals from cannabis’ various ingredients.

Since it’s a European company, it already has reach into a number of potential markets both inside and outside North America. And its biopharmaceutical structure means it has more credibility with regulators than other less structured start-ups.

But the big marijuana stock plays right now aren’t the up-and-comers as much as it is the established companies that can take advantage of this new, growing market.

For example, in the biotech space AbbVie (NASDAQ:ABBV) is major player. It has been selling Marinol since the mid-1980s for AIDS patients and others that need help controlling nausea and vomiting due to illness or medications.

Marinol is a synthetic replacement for THC, the active ingredient in marijuana. It is a lab-created exact replica and it has been used for decades. ABBV also has other derivatives in its pipeline and will likely be a major player in this new sector.

On the other side of things, Scotts Miracle-Gro (NYSE:SMG) was founded in 1868 and is best known for its grass seeds and fertilizer business. Having the massive distribution network and logistics that have been built over the past century and a half could spell big opportunities for this young industry.

What’s more, ABBV and SMG are solid stocks on their own merit and much safer than the newer cannabis stocks.

Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough StocksAccelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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