Here's How Big the Opportunity Could Be for Marijuana Stocks

By Todd Campbell Markets Fool.com

Wins by pro-pot advocates are ushering in a gold rush of interest in marijuana stocks. Some marijuana companies will be winners and others will be losers, but they'll all have a chance to compete in what GreenWave Advisors estimates could be a $25 billion market in 2021. Are you prepared to profit from marijuana legalization? Read on to discover how big this market could become.

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Image source: Getty Images.

First, a bit of background

Medical marijuana laws have been on the books in the U.S. for decades, but recreational marijuana laws are only recently winning support on state ballots.

California became the first state to approve medical marijuana when it passed legislation in 1996. Since then, 28 states have approved medical marijuana laws, including Arkansas, Florida, and North Dakota, all of which did so last November.

Momentum to legalize recreational marijuana resulted in Colorado and Washington passing pro-cannabis laws in 2012. Alaska and Oregon followed suit in 2014, and California, Maine, Massachusetts, and Nevada also passed recreational marijuana laws last November.

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So far, the market for recreational marijuana is off to a fast start. In Colorado, recreational marijuana sales eclipsed $1 billion in the state's fiscal year ending June 30, 2016. In November, Colorado's marijuana sales clocked in at $106 million, and sales are already north of $480 million this fiscal year. According to marijuana research firm Arcview Group, Colorado's marijuana sales could reach $2 billion by 2020.

Sky-high projections

Industry-watchers offer up different predictions for marijuana market growth over the coming years, but they all agree that marijuana is a multibillion-dollar growth opportunity.

ArcView pegs North American marijuana sales at $6.7 billion in 2016, up 30% from 2015, and its researchers think the marijuana market could be worth $20 billion in 2020.

Matt Karnes, founder of GreenWave Advisors, thinks marijuana market sales could hit $25 billion in 2020, and $30 billion in 2021. If so, that would represent compounded annual growth of about 35% over the next five years.

Those are pretty remarkable projections, but they pale in comparison to long-term market estimates released by Cowen and Company last year. Analysts at the investment bank believe that the marijuana market could climb to an eye-popping $50 billion by 2026. A big driver of that growth, at least in the short term, would be California's legalization, which they think could triple the market. Longer-term, Cowen and Company's model reflects an assumption of marijuana winning federal legalization.

Image source: Getty Images.

Marijuana stocks to buy now

Unquestionably, new states legalizing marijuana will lead to growth in 2017, but investors hoping to buy stocks to benefit from this growth have limited options.

The industry remains -- for now -- made up primarily of small companies, many of which aren't publicly traded. Of those companies that are publicly traded, many are trading off of the major Wall Street exchanges in markets that can be ripe for fraud.

Among marijuana stocks that are trading on the major U.S. exchanges, the most investment-worthy options right now appear to be drugmakers that are researching the use of marijuana's chemical cannabinoids as medicine.

The largest of these companies is GW Pharmaceuticals (NASDAQ: GWPH), a U.K.-based company with a market cap of $3 billion that has been researching marijuana-based medicine since the 1990s. In 2016, GW Pharmaceuticals' purified formulation of the marijuana compound cannabidiol successfully outperformed a placebo in lowering the number of monthly seizures in patients with rare and tough-to-treat forms of epilepsy.

GW Pharmaceuticals' management expects to file soon for approval of that formulation by the Food and Drug Administration, and if it's approved, it will be sold under the brand name Epidiolex. Drug-industry watchers believe that Epidiolex could eventually generate sales in the hundreds of millions of dollars annually, or more; however, there's no guarantee the FDA will approve it.

Investors hunting for marijuana stocks may also want to consider Corbus Pharmaceuticals Holdings (NASDAQ: CRBP) and Insys Therapeutics (NASDAQ: INSY). But both of those companies could be riskier than GW Pharmaceuticals.

Corbus is developing Resunab, an oral endocannabinoid-mimetic drug that it thinks could help patients with systemic sclerosis (or scleroderma, a chronic autoimmune rheumatic disease) and cystic fibrosis. The company reported intriguing mid-stage trial results for Resunab in systemic sclerosis recently, and data in cystic fibrosis is anticipated this quarter.

While Corbus' progress makes it intriguing, it still needs to conduct larger, late-stage studies before it can win approval to begin marketing Resunab, and the company reported a net loss of $5.35 million in the third quarter alone.

Insys Therapeutics arguably has even more question marks. It won FDA approval of a reformulation of the long-standing THC-derived drug Marinol last year; however, the drug has yet to be scheduled by the Drug Enforcement Administration, so sales haven't begun. Importantly, Insys Therapeutics is the subject of ongoing investigations into the marketing of its opioid pain reliever Subsys. The Justice Department arrested former key executives last year for allegedly paying doctors kickbacks to prescribe Subsys, and it's not clear to me that this matter is fully behind the company.

Overall, the marijuana market is undeniably intriguing. However, it's in the very early innings, and that makes investing in it very risky.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter, where he goes by the handle @ebcapital, to see more articles like this.

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