3 Myths About Marijuana Stocks

By Keith Speights Markets Fool.com

What do Hercules, Thor, centaurs, and marijuana stocks have in common? They're all the subjects of myths. Most myths have at least a little bit of truth interspersed with a lot that is false. That's the case with these three myths about marijuana stocks that some might mistakenly believe.

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Image source: Getty Images.

Myth No. 1: All marijuana stocks are hot.

Marijuana stocks in general are hot right now. It's wrong, though, to think that all marijuana stocks are performing well. They're not.

One of the marijuana stocks with the biggest valuations is Insys Therapeutics (NASDAQ: INSY). Insys trades at a market cap of roughly $650 million and won U.S. regulatory approval for its first cannabinoid drug, Syndros. You might think the biotech would be a big winner. Nope. Insys lost around two-thirds of its value in 2016.

Although approval of Syndros was a big positive for Insys, the drug still awaits scheduling by the U.S.Drug Enforcement Administration. In the meantime, Insys' revenue is falling due to plummeting sales ofSubsys, the company'ssublingual fentanyl spray for breakthrough cancer pain.

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A corollary of this particular myth is that marijuana stocks that are hot right now will automatically stay hot. Just look at Insys' track record to debunk this proposition. The stock more than doubled by mid-2015. That's pretty hot. By the end of the year, though, Insys had given up most of those gains and then experienced its real pain in 2016.

Myth No. 2: Increased acceptance of marijuana is the main driver of all marijuana stocks' success.

It's certainly true that use of medical marijuana and recreational use of the drug is becoming more accepted in North America. This increased acceptance has been a major factor in the success of several marijuana stocks.

The share price of Aurora Cannabis (NASDAQOTH: ACBFF), for example, quadrupled in 2016 thanks in part to increased acceptance of medical marijuana in Canada. Aurora began selling medical marijuana in Jan. 2016 and had registered 10,800 active patients by late November.

Aurora's success, though, didn't come about just because Canadians were more accepting of medical marijuana. The company took the right steps to reach out to patients and expanded its infrastructure quickly to keep up with demand. Others weren't so smart and didn't perform as well as Aurora did.

Some marijuana stocks have achieved success for reasons other than increased public acceptance of marijuana. This is particularly true for biotechs developing cannabinoid drugs. For instance,GW Pharmaceuticals' (NASDAQ: GWPH) stock soared in 2016 based on its pipeline success.

In March 2016, GW Pharmaceuticals announced positive results from a late-stage clinical study evaluating itslead cannabinoid product candidateEpidiolex in treatingDravet syndrome, a rare type of epilepsy. The biotech announced more positive results in June from a late-stage study of the drug in treating another rare form of epilepsy known as Lennox-Gastaut syndrome (LGS). GW followed up with additional positive results from another LGS study of Epidiolex in September.

Myth No. 3:All marijuana stocks are extremely risky.

Many marijuana stocks are extremely risky. That's especially the case with penny stocks. These stocks aren't available for trading on a public exchange and instead must be bought and sold over the counter. Public exchanges require that companies make audited financial information available to investors. That isn't the case with over-the-counter stocks.

This relative lack of information about the stocks, combined with low trading volumes for many of these stocks, results in added risk for investors seeking to invest in many of the marijuana stocks available. But not every marijuana stock is super-risky.

GW Pharmaceuticals is a good example. It's not a penny stock. The company appears to have a potential winner on its hands with Epidiolex. GW isn't a fly by-night venture that recently sprang into existence. The biotech was founded in 1998.

Of course, there's still a level of risk associated with investing in GW Pharmaceuticals. It's possible that Epidiolex won't win regulatory approval. Even if the drug does, it might not perform as well as some expect. However, those are the kinds of risks that any biopharmaceutical stock has.

Avoid the "myth-stakes"

Investors might be tempted to believe the hype about marijuana stocks without doing their homework. They could buy shares without understanding a company's business model and its path to success. Some might overlook the risks. Avoid these mistakes (or maybe I should say "myth-stakes") -- and you can potentially be successful by investing in solid marijuana stocks.

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