Marijuana stocks are not without their risks. Most are tiny, unprofitable penny stocks that most investors would be best off avoiding. However, if you're looking to invest in a legitimate pure-play marijuana business,GW Pharmaceuticals (NASDAQ: GWPH) is arguably the best choice available. What makes GW Pharmaceuticals such a compelling option for investors? These five charts give a few clues.
Image source: Getty Images.
Nothing shows how hot GW Pharmaceuticals has been among investors better than its stock performance over the last few years. Share prices have soared as the marijuana drug market has heated up.
The above chart, however, also points to a less exciting fact about GW Pharmaceuticals' stock: its volatility. Most investors love when stocks have a low beta, which is a measure of a stock's volatility in relation to the broader market. GW's beta is 2.98, reflecting price swings nearly three times more volatile than the market's average.
You might think that rising revenue helped power GW Pharmaceuticals shares to their dizzying gains. That's not the case.
Sales for GW's first product, Sativex, are declining slowly. Most of the company's revenue, though, still comes from research and development fees paid by partners. That revenue is also decreasing.
With revenue dropping, it only makes sense that GW Pharmaceuticals' bottom line would suffer. It is -- and the downward trajectory is worse than that of the company's top line.
The primary factor behind GW Pharmaceuticals' net losses piling up is the company's higher research and development costs. From 2014 to 2015, R&D costs increased by 77%. GW continues to spend even more on R&D in 2016.
However, those R&D costs are increasing for a good reason. GW Pharmaceuticals has plenty of pipeline activity going on.
GW's drug pipeline, Image source: GW Pharmaceuticals.
Epidiolex represents the future for GW Pharmaceuticals. This oral cannabinoid is in multiple clinical trials. If Epidiolex wins regulatory approval, the drug could reach peak annual sales of around $3 billion.
The most advanced studies for Epidiolex target Dravet syndrome, a rare genetic disease that occurs in infants, and Lennox-Gastaut syndrome (LGS), a rare type of epilepsy. GW isn't the only company interested in those indications, however. Insys Therapeutics (NASDAQ: INSY) has also announced plans to get approval for its marijuana-based drugs to treat Dravet syndrome and LGS. At this point, however, GW has the advantage. While late-stage studies are already in progress for Epidiolex, Insys hasn't started recruiting for its late-stage trials of its cannabidiol product.
With losses mounting and a busy pipeline, having enough cash is critical for GW Pharmaceuticals. As of the end of June, the company appeared to be in pretty good shape.
Actually, GW's cash stockpile looks even better now. In July, the company issued a public stock offering that netted an additional $273.1 million. GW Pharmaceuticals should be able to fund operations and its clinical programs well into the future.
The latter two charts -- pipeline and cash -- are probably most important to GW Pharmaceuticals right now. GW'sfuture success rides on Epidiolex and the cash needed to wrap up clinical studies and commercialize the drug. If Epidiolex delivers as GW hopes it will, the revenue and earnings pictures should improve significantly. Even better for investors, so should GW Pharmaceuticals' already-impressive stock chart. All told, if you can accept the risks associated with investing in this nascent industry, GW Pharmaceuticals is my favorite option for a pure play marijuana stock.
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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.