Marijuana Stocks: Plenty of Business Diversity, Yet One Common Theme

By Sean Williams Markets Fool.com

Marijuana, excuse the pun, has been growing like a weed for some time now. Just 21 years after California became the first state to legalize cannabis for medical purposes, there are now a total of 28 states that have legalized medical marijuana. Likewise, just a little over four years after voters in Washington and Colorado voted to legalize recreational pot, eight states in total have done so.

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Marijuana's blazing growth

One reason cannabis has been gaining such rapid momentum in the U.S. is the improving opinion of pot among the general public. National pollster Gallup has been conducting surveys on marijuana for nearly five decades, and the percentage of the public that'd like to see it legalized nationally has increased from just 25% in 1995 to 60% (an all-time high) in 2016. As favorability toward the drug improves, more and more states have been legalizing pot either for medical or recreational uses.

Image source: Getty Images.

State governments have played their role, too. Legally growing and selling marijuana provides new channels of revenue for state governments to collect taxes and licensing fees. In Colorado, $135 million in tax and licensing revenue was collected in 2015 on $996.2 million in legal weed sales, while in California, the passage of Prop 64 this past November (which legalized recreational pot) is expected to add an estimated $1 billion in tax revenue to the state.

Lastly, the significant growth potential behind marijuana has been an allure. Legal marijuana sales hit $6.9 billion in 2016 according to cannabis research firm ArcView, a 34% increase from the previous year. ArcView believes this figure could grow to $21.6 billion by 2021, while investment firm Cowen & Co. believes legal pot sales could tip the scales at $50 billion by 2026.

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Marijuana stocks offer plenty of business diversity

This latter point is what's attracted a flurry of marijuana companies to go public in recent years, giving investors a veritable sea of marijuana stocks to choose from.

One thing marijuana stocks definitely don't lack is business diversity, offering investors a lot of ways to potentially capitalize on marijuana's growth.

Image source: GW Pharmaceuticals.

Perhaps the most well-known cannabis stock is cannabinoid-based drug developer GW Pharmaceuticals (NASDAQ: GWPH). GW Pharmaceuticals has discovered more than five dozen different cannabinoids from the cannabis plant, and it uses these cannabinoids to access the natural CB receptor system in our bodies. Easily the most successful experimental drug to date in GW's portfolio is Epidiolex, a cannabidiol-based drug that met its primary endpoint in phase 3 studies for two types of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome.

Along those same lines, Medical Marijuana (NASDAQOTH: MJNA) licenses its cannabinoid testing and research to the medicinal cannabinoid industry. Medical Marijuana also provides management and consulting services, as well as chewing gum-based cannabis products.

But there are numerous pot stocks outside the biotech realm. Right now there are companies that are:

  • Developing marijuana breathalyzer devices for law enforcement;
  • Focused on consulting services for pot businesses;
  • Manufacturing THC-infused beverages and foods;
  • Providing banking solutions to marijuana companies;
  • Developing cloud-based technology to run point-of-sale and ordering systems for pot retailers;
  • Providing marketing services;
  • Leasing cultivation space and facilities;
  • Developing new and innovative lighting products for indoor grow farms.

This list could go on for quite some time. The point is that retail sales from dispensaries are far from the only way marijuana businesses are looking to take advantage of legal sales growth.

Image source: Getty Images.

Marijuana stocks share one common theme

Unfortunately, despite this business diversity, marijuana stocks do share something in common: they're basically all losing money, and there's nothing to suggest that this money-losing trend will ebb anytime soon.

Some investors might be quick to point to INSYS Therapeutics (NASDAQ: INSY), a profitable stock commonly called a "marijuana stock", to debunk this thesis. However, INSYS generated essentially all of its $55.2 million in sales during the third quarter from a sublingual drug known as Subsys, which isn't marijuana-based. It's not exactly fair to refer to Insys as a marijuana stock until it generates a decent percentage of its sales from its dronabinol-based medicines.

On the other hand, companies like GW Pharmaceuticals are expected to lose money for at least the next three years, and that's assuming the Food and Drug Administration approves Epidiolex. Losses for Medical Marijuana are also expected to continue, with the company reporting a nearly $4.3 million loss in the third quarter.

It's worth noting that one of the more dangerous aspects of investing in marijuana is that a vast majority of marijuana stocks are listed on the over-the-counter exchanges. Even though OTC exchanges have done their best to improve their listing and reporting standards, it can still be difficult to get accurate and up-to-date information on the financial health of the companies listed.

Image source: Getty Images.

Furthermore, most marijuana companies can be considered penny stocks in that they trade for less than $5 per share (and in many cases below $1) and have micro-cap valuations, and are thus completely avoided by institutional investors and hedge funds. Penny stocks tend to be highly volatile and risky investments that you're best off avoiding.

Beyond the red ink and the challenges in getting accurate data, marijuana stocks are also contending with the likelihood of the federal government standing firm on its schedule 1 status throughout President Trump's four-year term. Trump's newly appointed U.S. Attorney General, Jeff Sessions, is an ardent opponent of the legalization movement, and some of Trump's Republican colleagues in Congress are among those who've opposed the expansion of medical and/or recreational marijuana in their respective states. This means the continuation of inherent disadvantages for pot businesses, ranging from the inability to take normal business deductions to minimal access to basic banking services.

For the time being, investing in marijuana stocks could lead to your money going up in smoke.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.