Rating Marijuana Stocks: Less Risky, More Risky, Most Risky

By Todd Campbell Markets Fool.com

The stock market is already risky business, but it's even more risky when you're talking about emerging markets, such as the burgeoning marijuana marketplace.

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Following the U.S. elections on Nov. 8, 28 states now have medical-marijuana laws on the books, and eight states have passed recreational-marijuana laws. Marijuana legalization offers significant tailwinds for marijuana stocks, but not all marijuana stocks will be winners. In fact, many marijuana stocks are likely to be losers, especially those that are trading over the counter, where oversight is lax.

Although no one has any idea where marijuana stocks will trade one month, one year, or five years from now, I viewGW Pharmacueticals(NASDAQ: GWPH), Aphria, Inc.(NASDAQOTH: APHQF), andInsys Therapeutics(NASDAQ: INSY)as three of the most intriguing marijuana stocks right now. Read on to see how I'm currently ranking these three stocks on the risk spectrum.

Image source: Aphria, Inc.

Less risky marijuana stock: GW Pharmaceuticals

While it's tempting to invest in marijuana growers and dispensary stocks, a better idea may be to focus on backdoor marijuana companies that benefit from growing awareness of marijuana's benefits without the risk of falling into the crosshairs of the soon-to-be U.S. Attorney General Jeff Sessions, who has historically been a pro-pot adversary.

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GW Pharma is one of my favorite backdoor marijuana stocks, because it couldrack up big sales and profit from marijuana medicine that's won the FDA's blessing and thus can sidestep any future federal crackdown on marijuana dispensaries.

GW Pharma has been researching marijuana's chemical cannabinoids as medicine since the 1990s, and it appears to be on the cusp of winning an FDA green light for its CBD-based anti-epileptic drug, Epidiolex. This year, GW Pharma has reported results from placebo-controlled trials showing that Epidiolex reduces the rate ofmonthly seizures by about 40% from baseline in patients with rare forms of epilepsy, including Dravet syndrome and Lennox-Gastaut syndrome.

Management is in the process of putting together the information necessary to submit its findings to the FDA, and if regulators agree that Epidiolex can play an important role in treating epilepsy, then this could become a top-selling medicine over the coming years. Industry watchers' peak sales estimates vary, but pessimistic views still target Epidiolex as a nine-figure sales opportunity. If GW Pharma can grow sales to anywhere near there, then this company has a good shot at getting into the black.

Of course, it's not all clear sailing for GW Pharma. There's no guarantee that the FDA will approve Epidiolex or that doctors will prescribe it. Further, Epidiolex may have to compete with CBD-heavy strains sold at medical-marijuana dispensaries. Therefore, while this stock may be less risky than others, investors should still approach it cautiously.

Image source: GW Pharmaceuticals.

More risky: Aphria, Inc.

Another way to avoid stocks that could run afoul of the U.S. government is to look across the border to Canada. Its medical-marijuana market is growing rapidly, and a bill to legalize recreational marijuana in the country could be on tap next year.

If so, then investors might want to embrace Canadian marijuana company Aphria, Inc.

Aphria trades on the TSX Venture Exchange, but investors can also buy ADRs issued by U.S. banks that represent Aphria's shares in the United States.

There are three reasons to consider betting on Aphria. First, Aphria's already making money. Second, it's got low-cost production. Third, CEO Vic Neufeld was formerly the CEO of Canadian vitamin company Jamieson Laboratories Ltd. Neufeld was at the helm of Jamieson for over 20 years until the companywas sold for $300 million in 2014.

Neufeld is already planning for significant marijuana volume growth. Aphria is embarking on a$24.5 million project to triple the size of its marijuana production, and on Nov. 30, the company completed a Canadian stock offering, generating gross proceeds of $40.2 million Canadian that will be used to fund this and future expansion efforts.

In the most recent quarter, Aphria's sales were $4.4 million Canadian, up from $2.8 million the quarter before. Product volume increased to 585.2 kg from 340.4 kg sold in the prior quarter, and EPS totaled $0.01 Canadian last quarter.

Undeniably, a rejection of recreational marijuana in Canada could derail a lot of enthusiasm for Aphria's shares. Further, dilutive stock offerings could take a toll on earnings per share. Nevertheless, I think there's enough potential in the medical-marijuana market for this company to remain profitable, and if I'm right, then that gives investors a little insulation against any disappointing news.

Image source: Aphria, Inc.

Most risky: Insys Therapeutics

Insys Therapeutics markets Subsys, one of the most prescribed fentanyl pain killers on the market. It's debt free, and it's profitable. So why do I rate this stock a "most risky" marijuana stock?

Simple. The company's been shrouded in controversy since news began swirling in 2014 of investigations into the company's marketing of Subsys.Since then, the company's president has been replaced by John Kapoor, Insys' founder and chairman, and a former sales executive has been arrested. Investigations that could result in costly settlements remain ongoing, and compounding matters, Kapoor recently announced that he'll be leaving the company soon to return to his "outside interests."

Growing awareness of the abuse potential of opioids, including Subsys, is taking a toll on the company's sales this year, too. In the third quarter, Insys Therapeutics revenue tumbled by 40% year over year to$55.2 million, from $91.3 million in the third quarter of 2015.

TheSubsys debacle takes a lot of the shine off what could otherwise be an intriguing marijuana story. Insys recently launched a reformulation of the long-standing THC medicine Marinol, and that drug, Syndros, could have nine-figure sales potential. Insys Therapeutics is also working on its own CBD therapy for epilepsy that could compete with GW Pharma someday.

Overall, Insys Therapeutics has marijuana catalysts that make it intriguing, but theSubsys overhang makes this company's future too uncertain. If Insys Therapeutics can put the Subsys saga behind it, then this stock becomes less risky, but until then, it remains a case of "buyer beware."

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Todd Campbell owns shares of Insys Therapeutics.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.

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