How to Invest in Marijuana

Both in the U.S. and internationally, marijuana -- especially the medical variety -- is getting more and more accepted with time. So, how do you invest in it? In this episode of MarketFoolery, host Chris Hill talks with Motley Fool analyst Shannon Jones about how to get exposure to the fledgling industry without buying into the ever-risky penny stocks that make up most of the U.S. marijuana market.

Click play to learn about a few international companies for your marijuana stock watch list, as well as one domestic picks-and-shovels play; the exciting state of medical marijuana in the U.S. today; how growing acceptance of medical marijuana in the sports industry fits into changing views around the drug; and more.

A full transcript follows the video.

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This video was recorded on May 21, 2018.

Chris Hill: It's Monday, May 21st. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Industry Focus, Shannon Jones. Thanks for being here!

Shannon Jones: So glad to be here, Chris!

Hill: So, we're doing something a little different today and tomorrow. We're actually taping this on Friday because the multimedia team, of which our man behind the glass, Dan Boyd, is a proud member of, they're going to be doing an all-day training on Monday and Tuesday, so we're taping stuff early. We're not going to be talking about business news today or tomorrow. So, hang in there if there's business news. Hopefully, we'll get to it Wednesday, or later in the week on Motley Fool Money.

But, I wanted to talk to you because you have a science background, and I want to talk about an industry that I know you know a whole lot better than I do, and it's one that we get so many questions about, and that's marijuana. In particular, any time we do a Facebook Live video or anything like that, we always get questions like, "What do you think of marijuana stocks?" And the short and easy answer is, well, here in the United States, most of them are penny stocks and they're terrible.

But, there have been a few things that have happened recently that I thought might give us the opportunity to dig a little deeper into this, particularly on the medical side of it. Let's start with something, David Kretzmann actually mentioned this to me the other day, and this is a recent merger in Canada between Aurora and MedReleaf. It was a $2 billion merger, or something like that.

Jones: Yeah. One of the largest, if not the largest, acquisition deal in the industry. It was a $2.5 billion all-stock deal for MedReleaf that Aurora is deciding to move forward with. We'll see if the vote gets approved by shareholders. I imagine it will. In particular, this really is a continued trend that we're seeing in the industry. It's consolidation. You see big players eating other big players. These are two massive rivals who are now joining forces to form the largest cannabis producing company in the world.

Hill: In the world?

Jones: In the world.

Hill: And obviously, the regulations are different in Canada. That's obviously one option for investors. And I love the question. Even though there's the quick and easy answer of, "Well, here in the U.S., most of them are penny stocks," I love getting that question because it's a demonstration that investors are looking at growing trends and looking to invest into those trends, and certainly in the United States, where more and more states are approving various levels of marijuana use, whether it's on the medical side or the recreational side. It's a great question. Is this resulting entity one that you look at and you think, "Yeah, this is a good opportunity for investors"?

Jones: Yeah, I think it's definitely one to put on your radar. In particular with Aurora in this deal, they're looking at, really, global expansion. They're looking to become the top leader. For some of the listeners that have had questions about marijuana stocks, many of you all know that Canada is set to legalize recreational marijuana here sometime over the summer. They're going to be voting on June 7th. So, you see a lot of these deals happening in preparation for that.

But really, with Aurora, their focus is going to be in the medical marijuana space, which I think is the much better investment opportunity overall. Even though they will be supplying recreational use, they have come out and said that they will specifically focus on patients first. That means supplying medical marijuana companies globally. Europe has a pretty large medical marijuana market, and the U.S., which we'll get to in a bit, is also starting to pick up steam there, too. I think, if there are investments in the space that are not as risky as your penny stocks and the ones wrought with fraud, Aurora Cannabis is certainly one to keep an eye on.

Hill: And it really does seem like the medical space is where the opportunities, certainly for companies, it seems like there's going to be more of an opportunity for companies that are already in that space. And I've talked before about, Dan and I have gone to South by Southwest the last few years. Not this year, but last year, there was a huge presence on the trade show floor of marijuana companies, and almost all of them were on the medical side, on the research side, pharmaceutical, etc.

Which leads me to GW Pharmaceuticals (NASDAQ: GWPH), which is a company that I learned about from you. GW not standing for George Washington. I think that's my bias from living in this area. But, you were saying, GW Pharmaceuticals, which is publicly traded, is set to get FDA approval, yes?

Jones: Yeah. GW Pharmaceuticals will be hopefully receiving FDA approval coming up here by June 27th. That's what's called the PDUFA date, when the FDA is set to make a decision.

Hill: PDUFA? What is PDUFA?

Jones: It's the Prescription Drug User Fee Act. Basically, pharmaceutical companies pay lots of money to make sure the FDA can review, and also to make sure that they can do it in a timely fashion. The PDUFA date is the set approval date, which is June 27th.

One thing to note, though, GW Pharmaceuticals recently had an expert FDA panel here in mid April that unanimously recommended that the FDA approve their drug, which is called Epidiolex, for rare forms of childhood epilepsy. In this particular advisory committee meeting, the FDA, by the end of it, after the unanimous approval -- which is very rare -- said that they actually hope to expedite that date. So, really, the approval could even happen before June 27th.

Hill: So, you're saying that kind of approval is rare, the unanimous approval. Do you think that has any ripple effect in terms of marijuana and approvals within the FDA? Or is that just, GW Pharmaceuticals has a home run with this thing, and we can't extrapolate from that?

Jones: In the advisory committee meeting that took place in April, the company GW Pharma presented data from really well-controlled clinical trials, which is interesting for a couple of reasons. One, historically, medical marijuana companies haven't even made it to the FDA. Secondly, they haven't had the funding to really run really well-controlled trials that are worth the FDA's effort. So, not only did they do that, but they had some pretty extraordinary data.

In particular, for these rare forms of childhood epilepsy, these are children that are extremely sick. Some suffer from 40 or 50 seizures per week. They saw a reduction of 40% from their baseline seizure level, which is huge. So, GW Pharma was able to prove that the benefits outweighed the risk associated with their drug, Epidiolex, which is a huge first, and really will be a landmark FDA approval, and could really set up the industry, I think, moving forward, to continue to seek other disease classes and really expand its reach.

Hill: So, one of the things in a lot of different industries, not just marijuana, medical marijuana in particular, but one of the things that investors can look at is R&D spending. Is it reasonable to expect that we're going to see more pharmaceutical companies spending more R&D money in this area?

Jones: Oh, absolutely. Especially with GW Pharmaceuticals being among the first, and really showing that it can basically step up to the plate and have some well-controlled trials and show some pretty impressive data, I would not be surprised to see many of the major biopharma players also continuing to do that. GW Pharmaceuticals also has a competitor on its heels, a company called Zogenix, also looking at the same therapeutic areas as well. So, absolutely, you should expect to see biopharma jumping on board, too.

Hill: One other ... I don't want to say domino, because this is not a direct cause and effect, but, one other thing that I'm seeing, that I think moves us closer to a world where there are more viable options for investors looking to invest into the trend of marijuana, is something that doesn't show up on any balance sheet or anything like that, it's really more anecdotal. It's in the world of professional sports.

Jones: Yes.

Hill: We're seeing more and more athletes come out, particularly in the NFL -- there was a big story in the Washington Post recently, players who had recently retired from the NFL and from the NBA talking about how they were using marijuana just to manage the pain, and how much better it worked for them than, I'll just lump this in one category, how much better it was than pills, or injections, and that sort of thing. Maybe it's just me, but I feel like that just gets us one step closer to treating this as, for lack of a better word, a normal thing. In a way, it's no longer this taboo thing.

Jones: Absolutely, yeah. I think, in the world of professional sports, that's certainly one element of it. And really, what we're talking about is the pain management aspect, which is itself a huge industry, and even more importantly, the opioid epidemic that has resulted because of pain being such a chronic issue for so many Americans. For instance, according to the CDC, on average, 115 Americans die every single day just from an opioid overdose. This is a huge problem, not just exclusive to professional sports, but to America. To your point, Chris, it's interesting to see what the implications of removing that stigma of medical marijuana will be for professional sports.

And it's not just players. I believe it was in 2016, maybe even 2017, head coach Steve Kerr for the Golden State Warriors came out, shared his story about complications from back surgery, and talking about painkillers and then using medical marijuana, and how much benefit he saw from it. So, having a voice like Steve Kerr is one thing, from a coaching level. Even owners are now starting to chime in. Our beloved Jerry Jones, owner of the Dallas Cowboys --

Hill: [laughs] "Beloved."

Jones: [laughs] He's no stranger to the impact of the substance abuse policy, especially on his team, where disciplinary actions seemed to come out every week. Even he has come out and said, 'We need to change the policy for the NFL."

So, you're seeing this from players to coaches and even to owners. And I would even say, on the NFL level, from management, and even from the NBA office, you're now starting to see them open to studies to prove that medical marijuana could indeed be an alternative, or at least an option, for a lot of these players that are suffering from pain.

Hill: All kidding about Jerry Jones aside, it is sort of refreshing to see ownership taking this step. I think part of it has to do with newer owners coming into the league, particularly younger owners, for whom marijuana is just far less of a taboo subject. We had Andrew Brandt on Motley Fool Money last week talking about the Supreme Court decision on sports betting. One of the things that he and I were talking about was betting on sports being far less of a taboo thing than it was 30, 40 years ago, that sort of thing. I think we're seeing that play out with marijuana, as well.

Jones: Absolutely. I think some of the key questions that will be on the minds of not just sports fans but really for these athletes, and even for us as fans, is, No. 1, could this acceptance of medical marijuana really lead to A, an ease on the ban for marijuana? Could it also ease some of the disciplinary actions that we see? And granted, in 2014, I think it was the NFL that did actually increase their threshold for the amount of marijuana that could be in a player's system. But, we really want to know, what will that look like? And then, more importantly, how do you know that it's recreational use vs. medical need? I think that'll be the tougher question to answer, in terms of how they'll address that.

Then, thirdly, Jerry Jones has been pretty vocal about wanting this issue to be resolved sooner rather than later. Current thought process right now for the NFL, at least, is this may come up in the 2020 collective bargaining agreement for players and will be attached with that entire process. But, you could potentially see this come out as its own supplemental negotiation that happens before 2020, too.

Hill: Two things before I let you go. First, when you look at the entire industry, we've talked about Aurora, we've talked about GW Pharmaceuticals. Is there any other company that you look at and think, that's a company worth keeping an eye on? And it can be because of the amount of money that they're investing in R&D, or it could be just as simple as public statements they've made about exploration that they want to do.

Jones: Two quick companies come to mind. Cara Therapeutics is another company that is, I think, going to be at the forefront of medical marijuana. They have a couple of indications or therapeutic areas that they're looking into, as well. Also, too, if you're considering outside of just medical marijuana, Scotts Miracle-Gro.

Hill: Tim Hanson talked about that last week!

Jones: Yeah! Scotts Miracle-Gro, they have a really solid core business, and really, they're going to be supplying many major growers that are growing the marijuana. So, why not go after, I guess you'd call it a picks-and-shovels play at this point.

Hill: Yeah. And, last thing, since we were talking about the NFL, your beloved team, the Carolina Panthers.

Jones: Yes, the Carolina Panthers.

Hill: They have a brand-new owner. What is the optimism level for Carolina Panther fans right now?

Jones: I think we're all cautiously optimistic right now. Obviously, going through the process that we went through with losing a previous owner, a well-beloved owner in Jerry Richardson, and now going through a new owner, there are a lot of question marks. What's going to happen to the team, will they stay in Charlotte --

Hill: By the way, I've heard that, and it just seems like, it's a well-established team, so I'm not entirely sure why -- maybe that's just a gut-level panic reaction? The first time I heard that, I thought, "Well, why would they move the team?"

Jones: I think it's because Charlotte fans have been through this. The Charlotte Hornets, if you remember correctly, left to go to New Orleans. We finally got them back. So, I think there's some panic there. There's also, too, some wounds that still haven't mended. But, I think that's really on the mind of many fans. I think his name is David Tepper, former hedge fund manager, it'll be really interesting to see how he manages the team on a long-term basis, compared with how he actually manages his business. We'll see.

Hill: Paid cash for the team. $2.2 billion. That's the highest amount of money anyone has paid for a professional sports team in the United States.

Jones: And rightfully so.

Hill: Shannon Jones. You can read her on, you can hear her on Industry Focus. Thanks for being here!

Jones: Thank you so much for having me, Chris!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

Chris Hill has no position in any of the stocks mentioned. Shannon Jones owns shares of FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.