In case you've been living under a rock for the past year, marijuana stocks are among the top-performing industries. Over the trailing year, the average return from the 14 largest marijuana stocks by market cap is in excess of 100%.
The give and take of marijuana stocks
Why do investors suddenly have an insatiable urge to own cannabis stocks? It all starts with the sales figures behind the rapidly growing legal pot industry. According to cannabis research firm ArcView, legal sales in North America climbed 34% to $6.9 billion in 2016, and they're estimated to keep growing at an average annual rate of 26% through 2021. This is due to the expectation of more U.S. states legalizing pot, as well as Canada and Mexico expanding the legality of the substance. Finding an industry with a 26% compound annual growth rate for five years is practically unheard of.
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We've also witnessed a dramatic shift in the way Americans think about weed. According to CBS News, just 27% of those surveyed in July 1979 wanted to see marijuana legalized nationwide. As of April 2017, this figure had vaulted to 61% in favor of such a measure. Almost identical favorability has been seen in Gallup's polling, which has been done periodically over a nearly 50-year period. With more people than ever wanting to see pot legalized, the chances of change at the federal level are presumably growing.
But therein lies the issue: The U.S. federal government has dug in its heels on marijuana and seems unlikely to alter its scheduling of the drug anytime soon. Cannabis' Schedule 1 categorization means it has no medical benefits and is entirely illegal. It also means pot-based businesses are unable to take normal corporate income tax deductions, and their access to basic banking services, such as loans and a checking account, is extremely limited, if not cut off completely.
This marijuana stock has had a terrible run of late and here's why
This federal-versus-state bifurcation also tends to create a lot of volatility among pot stocks. Over the past two weeks, Medical Marijuana, Inc. (MJNA -5.00%), the very first publicly traded marijuana stock, has really taken it on the chin despite no readily apparent news. Shares of the company, which are currently valued at a mere $0.08 per share, have lost 20% in just eight sessions.
With no apparent news, you might be wondering what the issue is. Chances are, the move lower could be a result of a confluence of factors.
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To begin with, just a few days ago, we witnessed the House Rules Committee block a vote on the Rohrabacher-Blumenauer Amendment, which would protect medical marijuana businesses operating in legal states from federal prosecution. Medical Marijuana, Inc. is predominantly an investment company, but the investments it targets deal with cannabidiol (CBD), the nonpsychoactive component of cannabis designed to target medical patients. Without this rule in place, Attorney General Jeff Sessions would be free to wage war against medical marijuana businesses, which would almost certainly hurt Medical Marijuana, Inc.'s growth prospects in the United States.
Second, a big reason for the increase in Medical Marijuana's market cap over the past year has been the meteoric rise in Axim Biotechnologies (AXIM 21.31%). Medical Marijuana owns 43% of the outstanding shares of Axim, and Axim's stock has increased in value by 2,800% over the trailing year, through Sept. 8, 2017. That's led to a pretty nice paper gain for Medical Marijuana. However, Axim has also lost 67% of its market cap since the middle of January, meaning that even though Medical Marijuana still has a massive paper gain on its investment in Axim, it's lost a good chunk of its meteoric rise.
A third issue could be the company's quarterly reports. Medical Marijuana's second-quarter report, released in July, was its best quarter ever in terms of total sales. The $6.13 million in second-quarter sales marked a 269% increase from the prior-year period, much thanks to rapid growth from wholly owned subsidiary Kannaway. Nevertheless, the company still reported a more than $2 million net loss for the quarter, increasing its accumulated deficit to $79.6 million. This is a fancy way of saying that since Medical Marijuana, Inc. was incorporated, it's lost almost $80 million.
And finally, some investors might have debt and dilution concerns. The company has $12.65 million in convertible notes on its balance sheet as of the end of the second quarter. While some of these notes may be extinguished by cash repayment, the simple fact that they can be converted to shares almost guarantees some potential for dilution to existing shareholders at some point in the future.
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A new ray of hope
Though Medical Marijuana, Inc. has an uphill battle to climb, it also has a new ray of hope in 2017. In June, Mexican President Enrique Pena Nieto signed a bill passed in both houses of Mexico's legislature that legalized medical cannabis throughout the country. Medical Marijuana, Inc. already had distribution of CBD products lined up in Mexico long before this bill was signed into law, meaning it appears to have a pathway to rapid growth south of the U.S. border. That could help counter any negative implications caused by the House Rules Committee's decision to deny a vote on the Rohrabacher-Blumenauer Amendment.
It should also be noted that Medical Marijuana's bottom line has improved, albeit the company is still losing money. If not for the $1.67 million the company forked over in interest expenses during the second quarter, its net loss would have been just $709,434, which isn't bad considering that it's an investment company that's built itself from the ground up.
Still, there's a long road ahead for Medical Marijuana, Inc. and its shareholders. We're going to need to see continued bottom-line improvement, as well as renewed protections for medical cannabis businesses in the U.S., if this company is to have any shot of long-term success. Though the U.S. public overwhelmingly supports the idea of legalizing medical cannabis, it simply doesn't make Medical Marijuana, Inc. a good investment unless Congress changes its tune on medical weed.
