3 Marijuana Stocks to Watch

By Keith SpeightsFool.com

Source: United States Fish and Wildlife Service.

Here's a recipe for investing disaster: Buy penny stocks in a new market that many are claiming will soar in the next few years. Unfortunately, some could be headed for such a disaster with marijuana stocks. With several states fully legalizing cannabis and others allowing medicinal use of the drug, money has poured into companies that seem poised to profit from the nascent market. The problem is that investors could very well see their dollars go up in smoke with many of these stocks.

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However, there are a handful of companies that bear careful scrutiny, in particular those focusing on serious medical marijuana research. Here are three marijuana stocks that investors should watch.

1.GW Pharmaceuticals plc GW Pharmaceuticals stands out as one of the most viable investment plays in the marijuana space right now. The company's Sativex, a cannabis-based drug used for treating spasticity due to multiple sclerosis, is already on the market in 15 countries and has been approved in another 12 countries. Late-stage clinical trials are also under way for Sativex in treating cancer pain.

GW Pharmaceuticals has targeted several other indications to explore the medical potential for cannabinoids. The company has two drug candidates in clinical trials for treating epilepsy. Epidiolex received Orphan Drug Designation from the FDA for treating two types of pediatric epilepsy -- Dravet syndrome and Lennox-Gastaut syndrome. GW Pharmaceuticals also has studies under way with experimental drugs focusing on the treatment of type 2 diabetes, schizophrenia, and glioma.

Although the company isn't yet profitable, GW claims some financial positives that most other marijuana stocks can't. Thanks to Sativex, it has a solid revenue stream, generating over $46 million in the last 12 months. The company's cash position also looks pretty good, with $234 million in cash and cash equivalents.

2.Insys Therapeutics Insys Therapeutics' financial position looks even better than GW Pharmaceuticals, but not from any major contribution by marijuana-related products. The company made nearly $38 million in earnings last year on $222 million in revenue.

Two drugs drive Insys' financial performance currently. Subsys, used for breakthrough cancer pain in opioid-tolerant patients, is by far the company's biggest-selling product, accounting for over 99% of total revenue. Insys also sells genericDronabinol SG, a second-line cannabinoid drug used forchemotherapy-induced nausea and vomiting and anorexia associated with weight loss in patients with AIDS.

Dronabinol SG isn't making a big financial impact for Insys, but the company does have two other marijuana-based drugs in development that could one day be winners. First, Insys is in phase 2/3 clinical studies for Dronabinol Oral Solution, an orally administered liquid form of the drug that looks to be more effective than the capsule version. Second, like GW Pharmaceuticals, Insys won FDA Orphan Drug Designation for itscannabidiol oral solution as a potential treatment forDravet syndrome and Lennox-Gastaut syndrome.

3.Cara TherapeuticsCara Therapeutics doesn't have any products on the market yet, so the company's financial position isn't as solid as the other two on our list. And while Cara's pipeline includes cannabis-based research, the company's future isn't as tightly linked to the medical marijuana industry as either GW Pharmaceuticals or Insys.

Pain medication CR845 is Cara's lead candidate. The kappa opioid receptor drug is in phase 3 testing for treating post-operative pain and is in phase 2 trials for two other indications -- acute and chronic pain and pruritus, a severe itching condition.

It's worth watching Cara as a marijuana stock, though, because of its other pain drug. CR701 is aperipherally acting cannabinoid receptor agonist for which Cara owns full rights. The drug has shown considerable promise in pre-clinical testing. Cara is looking to move CR701 into a phase 1 clinical study. For the immediate future, however, CR845 will be the catalyst behind any stock movement for Cara.

Most likely to succeedIf you asked Wall Street analysts, they'd probably pick Cara Therapeutics as the stock with the most upward potential over the next year. And they could be right -- especially if CR845 does well in its late-stage trials.

On the other hand, if you're looking for the stock most likely to succeed primarily because of its marijuana-based drugs, GW Pharmaceuticals is the better pick. GW's entire research effort focuses on cannabinoids. I think Sativex sales should continue to grow. Epidiolex shows considerable promise in treating epilepsy. For these reasons, GW seems to be the best pure-play marijuana stock for investors to watch closely in 2015.

The article 3 Marijuana Stocks to Watch originally appeared on Fool.com.

Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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