This article was updated on Aug. 15, 2017, and originally published on March 4, 2017.
With the increasing number of states allowing the use of marijuana -- medically and recreationally -- the allure of marijuana stocks is understandable. It's a lot easier to make money in growing industries.
But before investors buy marijuana stocks, they should know what they're getting themselves into.
Many marijuana stocks, like Medical Marijuana Inc., are penny stocks that trade over the counter rather than on one of the major exchanges. It can be dangerous buying penny stocks and that goes double for an industry where the federal government still hasn't legalized it.
Investors could play the fringes of the plant market to stay within the realm of legal sales, investing in companies that support the industry rather than those producing the product directly. Scotts Miracle-Gro (NYSE:SMG), for instance, has acquired multiple hydroponics companies that serve the marijuana-growing industry. But hydroponics -- for marijuana as well as other plants that can be grown that way -- make up less than 20% of Scotts Miracle-Gro's revenue. Even if the growth in the marijuana industry helps boost that category for Scotts Miracle-Gro, investors still have to be comfortable in the rest of the business that will drive profits for the near future.
A better way to invest in the benefits of marijuana
Rather than buying companies producing fairly unregulated marijuana products, investors are likely to find better success purchasing those that are developing Food and Drug Administration-approved products based on the compounds in marijuana.
The benefits are clear:
- There are no issues with federal laws; if the FDA says a drug has a medical purpose, the Drug Enforcement Agency has to allow its sale.
- While it takes more time and money to get prescription drugs approved, the regulations can limit competition.
- Insurance companies will cover FDA-approved drugs and there shouldn't be any issues with drugs being from marijuana as long as they work.
- Doctors like the manufacturing consistency and scientific rigor required to get drugs approved by the FDA.
There are a handful of companies with marijuana-derived drugs that are either on the market or that should be approved by the FDA soon.
GW Pharmaceuticals (NASDAQ:GWPH) , for example, sells Sativex in 30 countries outside the United States to treat spasticity associated with multiple sclerosis, but the biotech's biggest potential comes from Epidiolex, a cannabidiol derived from marijuana that treats rare epilepsies. Clinical trials in two pediatric epilepsies, Lennox-Gastaut syndrome and Dravet syndrome, both showed a reduction in seizure frequency for patients taking Epidiolex compared to those taking placebo, making an approval likely. GW Pharmaceuticals plans to complete the submission of its marketing application for Epidiolex to the FDA in Oct.
As another example, Insys Therapeutics' (NASDAQ:INSY) Syndros, an FDA-approved liquid formulation of cannabinoid dronabinol, was launched in July to treat anorexia associated with weight loss in AIDS patients and cancer-induced nausea and vomiting.
Both GW Pharmaceuticals and Insys Therapeutics are in a substantially better situation than companies working on the unregulated side of the marijuana industry, especially since they have already proven their drugs work.