The marijuana industry is growing like a weed, and marijuana stock investors can't help but take notice.
According to a recent report from Marijuana Business Daily entitled "Marijuana Business Factbook 2017," U.S. legal marijuana sales are expected to grow by 30% to a range of $5.1 billion to $6.1 billion in 2017. By 2021, legal recreational and medical cannabis sales are forecast to top $17 billion, representing approximately 300% growth between 2016 and 2021. And this could be just the tip of the iceberg. Cannabis research firm ArcView estimates that $46.4 billion in sales last year were conducted on the black market, meaning there's ample opportunity for businesses to continually sway consumers to legal channels in the years to come.
Of course, choosing a marijuana stock to invest in could be difficult given that there are dozens of them. Emotions surrounding the marijuana industry are running high, and worst of all, investors could be blindly buying into marijuana stocks without fully understanding the risks of the industry.
With this in mind, we're taking the time to analyze a pot stock each week until we've covered all of the major players with a market cap in excess of $200 million. Here are the marijuana stocks we've discussed so far:
- GW Pharmaceuticals
- Insys Therapeutics
- Aurora Cannabis
- Canopy Growth Corp.
- Corbus Pharmaceuticals
- Cara Therapeutics
- Zynerba Pharmaceuticals
- Axim Biotechnologies (AXIM 22.07%)
Today, we're going to take a closer look at Medical Marijuana, Inc. (MJNA -1.87%).
What Medical Marijuana, Inc. does
While GW Pharmaceuticals currently holds the title of being the largest pot stock by a mile, Medical Marijuana, Inc. holds the distinction of being the first publicly listed marijuana stock.
Unlike most marijuana stocks that tend to focus on developing a handful of products or a small portfolio of cannabinoid-based drugs, Medical Marijuana, Inc. is a holding company that's invested in more than a half-dozen cannabidiol (CBD)-product companies for the pharmaceutical, nutraceutical, cosmeceutical, or industrial hemp industries.
The company's eight listed subsidiaries and investments include:
- HempMeds, which offers marketing and sales of CBD-based products in the U.S.;
- HempMeds Mexico;
- HempMeds Brasil;
- Kannaway, which specializes in hemp-based botanical products;
- KannaLife Sciences, which is a cannabinoid-based drug developer;
- Axim Biotechnologies, which is also a developer of cannabinoid-based medicines;
- MPS International, a security consultation service for the weed industry;
- Wellness Managed Services, which provides support services to the pot industry.
Promise and opportunities
The most obvious reason marijuana stock investors are likely excited about a company like Medical Marijuana, Inc. is its portfolio diversity. Its complete ownership of HempMeds and investments in KannaLife Sciences and Axim Biotechnologies gives the company access to retail CBD product sales, as well as the opportunity to earn significant investment rewards if Axim's and KannaLife's cannabinoid-based products succeed in clinical trials. Not being tied to a single product or company allows for diversity that's rarely seen in the marijuana industry.
Axim Biotechnologies is also a critical cog to Medical Marijuana's success. The company currently own approximately 22.67 million shares of Axim, which based on its closing price of $10.04 on Tuesday, June 13 works out to $227.6 million. Mind you, Axim's share price was only at $0.40 at the end of the first quarter in 2016, so it's had a monstrous run higher. Though Medical Marijuana, Inc.'s investment gain in Axim is currently unrealized, the $227.6 million could, in theory, provide the company with bountiful capital to make new acquisitions and fund its operations for a long time, should it decide to sell.
Another factor working in Medical Marijuana, Inc.'s favor is that the Mexican government is looking into legalizing medical cannabis. Legislation has already passed in Mexico's government and would only need to be signed by its President to become law. With HempMeds Mexico in perfect position to distribute CBD-based products, Medical Marijuana, Inc. could soon find itself a beneficiary of pot's expansion in North America.
One last factor worth pointing out is that Medical Marijuana's first quarter operating results showed a 78% narrowing in its loss from the prior-year period to $2.2 million from $11.1 million. At the same time, much thanks to Axim, its total assets were nearly $495 million, more than double the $214 million recorded in Q1 2016.
Risks and concerns
But as we usually see with marijuana stocks, there are a number of risks as well.
Unquestionably the biggest risk for Medical Marijuana, Inc. is that its future is intricately tied to that of Axim Biotechnologies. Yes, it does have eight total assets and investments listed above, but more than half of its total assets are dependent on the value of its stake in Axim. If Axim Biotechnologies' stock falls off a cliff, chances are that Medical Marijuana and its shareholders are going to be in for some pain.
More importantly, as we discussed last week, Axim is arguably the most overvalued of all marijuana stocks. Though the company has well over a dozen listed studies on its website, it ended 2016 with less than $1 million in cash on hand and doesn't appear to be beyond early stage dose-finding and safety studies in all but one trial. In other words, investors have been bidding up Axim on light volume without even seeing if the company's CBD therapies work. That's a major gamble that could come back to haunt Axim and its 43% stakeholder, Medical Marijuana.
Laws also stand in the way of Medical Marijuana, Inc.'s success. The Trump administration in the U.S. has signaled that it could be tougher than the Obama administration when it comes to regulating weed. Also, having Jeff Sessions, an ardent opponent of marijuana's expansion, as attorney general all but squashes any ideas of the U.S. federal government looking to legalize or reschedule pot anytime soon. This means a number of tax and banking access disadvantages for marijuana businesses are likely to persist.
Finally, as a counter to the point above about Medical Marijuana's losses narrowing, the company really doesn't have much going for it that suggests it'll profitable on a recurring basis anytime soon.
Should you buy Medical Marijuana, Inc.?
Now for the most important question of all: Should you buy Medical Marijuana, Inc.?
On one hand, it's pretty evident that the company has sufficient funding and business diversity. Mexico moving forward with a possible medical cannabis legalization could be big news, as would the ongoing state-level expansion of marijuana in the United States.
However, I believe there are far too many negatives here to merit serious consideration for investors. Its ties to Axim Biotechnologies are exceptionally risky considering that Axim has yet to prove the worth of its intellectual property in human clinical trials. Medical Marijuana shareholders also run the risk of being disappointed by adverse governmental regulations and rulings. Let's not also forget that cannabis is still illegal throughout most of North America (medical cannabis has been legal in Canada since 2001). And lastly, there's no quick fix that suggests recurring profits are around the corner.
Unless we see a major shift in governmental policy in the U.S. or Mexico, Medical Marijuana, Inc. probably doesn't belong in your portfolio.