Think fast: What do Sears Holdings (NASDAQOTH:SHLDQ), GameStop (NYSE:GME), Spirit Airlines (NYSE:SAVE), Tootsie Roll (NYSE:TR), and Papa John's International (NASDAQ:PZZA) all have in common? And before you submit your guess, being a consumer-facing brand isn't the answer I'm going for.
Did you guess that they're all small companies? If so, that's not correct. While Sears Holdings is a small-cap company because of its long-term downtrend, the remaining four are firmly mid-cap publicly traded companies with a $2 billion or higher valuation.
Are they all dealing with problems? Not exactly. While it's true that Sears is buried under $4 billion in net debt, GameStop's brick-and-mortar gaming locations are losing out to streaming content, and Spirit Airlines is suffering from a price war with major airlines as a result of cheaper fuel prices, Tootsie Roll and Papa John's are doing just fine. Tootsie Roll's second-quarter report delivered a "sweet" 12% improvement in year-over-year profit, which had a lot to do with a lower effective tax, while Papa John's delivered (yes, another pun) a nearly 7% increase in year-over-year earnings per share.
The answer also isn't that they all do, or don't, pay a dividend. Tootsie Roll and Papa John's both sport a yield that's close to 1%, while GameStop is paying out a ridiculous and potentially unsustainable yield that's now north of 7%. Comparatively, Spirit Airlines and Sears aren't giving their shareholders anything in the way of dividends.
The shocking thing these stocks have in common
The answer to this somewhat trick question is that all five of these companies boast smaller market caps than GW Pharmaceuticals (NASDAQ:GWPH), which happens to be the largest marijuana stock by market cap at $2.74 billion as of Friday, Sept. 15. Despite having consumer-facing brand-name products and services, these companies are all valued at less than a company that's working with a substance that the U.S. federal government says is illegal. Think about that for a moment.
GW Pharmaceuticals isn't a traditional grower and producer of dried cannabis like we see from the publicly listed stocks in Canada. As the name implies, it's a pharmaceutical company that's utilizing cannabinoids from the cannabis plant to effect positive biologic changes. We have naturally occurring cannabinoid receptor systems within our bodies, and GW Pharmaceuticals is looking to exploit that CB system to alleviate or cure certain ailments.
The company's lead product is an oral experimental drug known as Epidiolex that contains cannabidiol (CBD), the non-psychoactive component of cannabis. It's been tested in multiple late-stage trials in patients with two rare types of childhood-onset epilepsy, and in all instances it's led to a statistically significant reduction in seizure frequency. There is no precedence to the Food and Drug Administration (FDA) approving a cannabinoid-based drug; nevertheless it's probably going to be tough for the FDA to turn Epidiolex away from Dravet syndrome and Lennox-Gastaut syndrome patients following its excellent phase 3 results.
If approved, Wall Street analysts have indicated that Epidiolex could reach peak annual sales of near $1 billion, assuming it's priced correctly, launches flawlessly, and has opportunities to expand its label to new indications in the future. Since most small and mid-cap drugmakers tend to be valued at around three times the estimated peak annual sales of their lead drug, this is how an aggressive $2.74 billion valuation was derived for GW Pharmaceuticals by investors.
Just in case you forgot...
But once again, it's worth pointing out that cannabis is entirely illegal at the federal level. The schedule I categorization for pot means that it has no recognized medical benefits and is on par with LSD and heroin. GW Pharmaceuticals has somewhat received a pass from Wall Street given that it's running clinical studies in an attempt to help patients with debilitating diseases. However, that doesn't mean GW Pharmaceuticals is necessarily in the clear.
Earlier this year, now-former White House press secretary Sean Spicer intimated that the Trump administration would take a tougher stance on marijuana than the hands-off approach taken by the Obama administration. The appointment of Attorney General Jeff Sessions, an ardent opponent of marijuana's expansion, only seemed to confirm this position. But through more than eight months of the Trump presidency, no changes have been made in the way the federal government and individual states interact with one another regarding weed.
However, that could soon change. Earlier this month, the House Rules Committee blocked a vote on the Rohrabacher-Blumenauer Amendment, which protects cannabis businesses operating legally in states that have passed marijuana initiatives or amendments from federal prosecution. Though this doesn't exclude the Amendment from making it into the 2018 budget, it could be a stumbling block that opens the door for Sessions to wage war against the marijuana industry. It's unclear how that would impact GW Pharmaceuticals' research, but my personal suspicion is that it wouldn't be good news, and it could make launching Epidiolex all the more difficult.
Nonetheless, the fact that a marijuana stock is worth more than brand-name companies like Sears, GameStop, Spirit Airlines, Tootsie Roll, and Papa John's is a testament to the growth investors believe lies behind the pot industry. The question is whether or not investors will be disappointed by any actions taken by the federal government. Only time will tell.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short October 2017 $22 calls on GameStop. The Motley Fool recommends Spirit Airlines. The Motley Fool has a disclosure policy.