As you probably know, the marijuana industry is the hottest sector in the market right now. Nationwide legalization is imminent. It’s going to happen. It’s just a matter of time. Of course, the cannabis industry won’t reach its full potential until that actually happens. That’s why marijuana stocks are so hot right now. Everyone is scrambling to climb aboard the ship before it leaves port.
The problem, though, is that investors can’t just run willy-nilly into pot stocks.
Sure, there are companies that will grow by multiples of 10 and even 100. But the industry is also rife with unprepared upstarts and outright frauds that will ultimately flame out. So if you’re going to invest in pot stocks, you better be able to tell a good one from a bad one. That’s why I’m going to look at one of each today.
One example of a good marijuana stock is Canopy Growth Corp. (TSE: WEED, OTC: TWMJF).
Canopy is a Canadian company, which is great.
Canada is much further along than the United States in terms of marijuana acceptance, legalization, and regulation.
Medical marijuana has been legal across the country since 2001. That’s something that can’t be said of the United States even now, in the year 2017. Furthermore, Prime Minister Justin Trudeau introduced legislation in April to legalize the recreational use of marijuana nationwide. That’s expected to pass in 2018.
This puts Canada light years ahead of America, where regulation and law enforcement vary state-to-state, and the federal government still considers cannabis a Schedule I drug, alongside heroin, LSD, ecstasy, and peyote.
Again, Canadian companies have a huge head start by comparison. Not only has that allowed them to set up shop domestically. But it’s given them the opportunity to export their products to other countries as they come around. That includes countries like Germany, Australia, Colombia, and Brazil.
This is all great for a company like Canopy, which has six licensed facilities and approximately 665,000 square feet of production growing capacity. It also has an aggressive growth strategy, acquiring competitors like Mettrum Health.
So far, the company has only been able to address the medicinal marijuana market. But that market will expand exponentially when recreational weed is legalized next year. Recreational weed legalization in Canada could add $5 billion to $7 billion in annual revenue when that happens.
Canopy’s sales have more than tripled in the past year to $18.5 million. The company’s adjusted net income has tripled as well, coming in at $5 million over the first nine months of its fiscal year.
The company has its detractors and drawbacks, of course. Critics will point to the stock’s sky-high valuation which pegs the company at more than $1 billion. And that’s fair enough.
It’s certainly pricey. But if the growth comes down the road that doesn’t really matter. Facebook was valued well beyond its earnings when it debuted, but look where it’s gone since then.
Investors are betting on the future, and they’re willing to pay a premium to get in on the ground floor of this fledgling industry.
Especially for a company like Canopy, which is the perfect example of a high-riser. It’s no surprise the stock’s shot up 130% over the past year.
Now let’s look at a burnout.
If there’s a specific type of cannabis company I’d encourage investors to avoid it’s pharmaceutical companies like Insys Therapeutics (NASDAQ: INSY).
Insys isn’t a marijuana grower or retailer; it’s a drug developer.
Still, it often gets lumped into the pot stock discussion because one of its two key drugs is THC-based. THC, or tetrahydrocannabinol, is of course the psychoactive component of cannabis.
The drug is called Syndros, and it’s an oral dronabinol solution. The drug can be used by chemotherapy patients to help alleviate their nausea and vomiting and to help AIDS patients with weight loss. It was approved by the FDA last year, and in March, the DEA declared Syndros a Schedule II drug.
Its pathway to pharmacy shelves is now clear, and it should be there by the second half of this year.
Insys is also advancing another cannabidiol (CBD)-based drug that’s designed to treat pediatric epilepsy.
That’s all well and good, but the problem here is Insys’s main drug Subsys.
Subsys is an opioid-based painkiller that’s currently responsible for the vast majority of the company’s income.
Indeed, Insys is an opioid company that dabbles in cannabis rather than a pure marijuana stock. In fact, INSY donated a half-million dollars to the anti-legalization movement in Arizona — strictly because legalized medical marijuana is a huge threat to Subsys and its federally-approved prescription pot drug Syndros.
If a pot company is lobbying against legalization, it’s not a good pot stock.
Worse, the company is also facing legal troubles.
It’s currently facing federal inquiries about its practices, including alleged promotion of Subsys for off-label uses. The company pays speakers fees to doctors, some of whom have had their licenses suspended or face jail time for over-prescribing the drug. And in Connecticut, one nurse has admitted to taking kickbacks in exchange for prescribing it.
Shady pharmaceutical companies masquerading as pot stocks should obviously be avoided. And Insys is chief among them.
These are just two examples of the profits and pitfalls to be found in the cannabis sector.
And they’re just the tip of the iceberg. So if you’re going to dive into pot stocks take caution.
There are huge gains to be made, no doubt. But there are also frauds and fakers out there.