When it comes to the fastest-growing, and riskiest, industries in the stock market, none takes the cake like legal marijuana.
According to cannabis research firm The Arcview Group, legal sales in North America grew by 34% in 2016 to $6.9 billion, and they're on track to grow by 26% annually through 2021 to nearly $22 billion. Mind you, an estimated $46.4 billion in weed sales were conducted on the black market last year, giving legal channels ample opportunity to bring in new customers and revenue in the years to come. These rapidly growing sales figures have been a big reason that marijuana stocks have been popular investments of late.
Of course, we have to give credit where credit is due: the public. If not for the rapidly changing perception of marijuana among the public, it's unlikely that cannabis sales would be expanding as quickly as they are. According to CBS News, support for legalizing pot nationally has more than doubled to 61% in April 2017 from 27% all the way back in 1979. The higher the percentage in favor of legalizing marijuana, presumably the more pressure that'll be placed on lawmakers in Washington to change its scheduling.
But at the same time, investing in marijuana is incredibly risky. Just one country in the world (Uruguay) has fully legalized recreational weed, and the U.S. federal government could, at any time, reinstitute federal law and roll back over two decades of progress. In other words, it's a fast-growing industry, but its long-term outlook is as murky as mud.
Nonetheless, it's becoming hard to ignore the growth potential attached to the pot industry. With this in mind, aggressive investors with an appetite for growth, and also the realization that losses could be substantial if they're wrong, may want to get small-cap marijuana stocks on their radars. If you're among them, here are three small-cap marijuana stocks you should be following.
The first company you should absolutely have on your radar is MedReleaf Corp. (NASDAQOTH: MEDFF), a producer and retailer of dried cannabis and cannabis oils in Canada. If the name isn't too familiar, that's likely because MedReleaf only went public about five months ago. It is, however, one of the largest medical-cannabis players in Canada, in terms of market share.
A clear reason to be excited about MedReleaf's prospects is the growth in Canada's medical-marijuana market, along with the possibility of recreational legalization by July of next year. Health Canada noted in May that the number of registered medical patients was growing by 10% a month, which fuels hopes that many medical-pot growers could be profitable from the medical side of the equation alone.
But perhaps the most exciting aspect of MedReleaf is that the company is already healthfully profitable. In fact, it's the cheapest pure-play marijuana stock if we're using price-to-earnings as our valuation metric. Since producing a nominal loss in 2015, MedReleaf has been profitable in each of the past two years. In fiscal 2017, it wound up reporting $8.7 million in net income, more than quadrupling what it reported in 2016, on $31.9 million in sales (both figures are converted to U.S. dollars). This sales figure was up by more than 100% from the prior-year period.
Why so profitable? It's really all about MedReleaf's clientele. It caters to a more affluent customer with its dried cannabis strains and its cannabis oils. Cannabis oil has a higher price point than dried cannabis, and thus higher margins. In its home market, MedReleaf is the clear market-share leader in cannabis oils.
Long story short, if Canada moves forward with legalization efforts, MedReleaf could really be rolling in profits.
There are few things riskier than trying to catch a falling knife, which is a descriptor pretty close to what Insys Therapeutics (INSY) is going through at the moment. Insys finds itself more than 80% below its all-time high as a result of issues tied to its lead drug, Subsys.
Subsys is a synthetic opioid that's administered sublingually for the treatment of breakthrough cancer pain. However, allegations and lawsuits suggest that Insys' management and marketing team knowingly and willingly targeted off-label use of Subsys, by focusing their sales efforts on physicians who regularly prescribe opioid medications. That's a no-no, and if found guilty Insys could face some hefty fines and/or sales restrictions. Since peaking at more than $330 million in sales in 2015, Subsys' sales have been halved, and they're still falling. As a result, Insys has gone from healthy quarterly profits to quarterly losses.
The reason you'll want Insys on your radar in spite of its recent woes is the launch of Syndros, an oral dronabinol solution that's essentially a synthetic form of tetrahydrocannabinol (THC), the psychoactive component of cannabis. Syndros was approved by the Food and Drug Administration as a treatment for chemotherapy-induced nausea and vomiting, and anorexia associated with AIDS, all the way back in June 2016. But the drug was only launched in August of 2017, as Insys had to wait for the Drug Enforcement Agency to schedule Syndros, and for the FDA to give its final OK on a marketing label. If Insys plays by the rules with Syndros, it could generate more than $200 million in peak annual sales.
Additionally, Insys recently filed for a new drug application for its buprenorphine sublingual spray as a treatment for moderate-to-severe acute pain. The pain market already has an abundance of competition, but an approval here would help to further diversify Insys' revenue stream.
If Subsys' sales are stabilized, and Insys can steadily grow both Syndros and its buprenorphine spray (assuming approval from the FDA), Insys could be a sneaky value play among small-cap marijuana stocks.
A final marijuana stock worth adding to your radar is Cara Therapeutics (CARA -5.59%), which always seems to be one clinical trial away from exploding higher or imploding.
Cara is a clinical-stage drug developer at this point in its existence, with its future reliant on CR845, a kappa-opioid receptor agonist, and CR701, a preclinical cannabinoid-receptor agonist that's responsible for Cara's association with marijuana stocks. For the time being, all eyes are plainly focused on the development of CR845, which is being targeted as a treatment for chronic pain and pruritus (a scientific term for itching). Chronic pain is by far the more profitable indication of the two.
Cara encountered quite the speed bump earlier this year, when a top-line data release for its phase 2b study involving CR845 for osteoarthritis (OA) of the knee and hip mostly missed the mark. Two of the three lower doses lacked statistical significance in either indication, with only the OA trial of the hip in the highest dose (5 mg) meeting statistical significance for reduction in mean joint-pain score. It wasn't what Wall Street was looking for.
However, in June the independent data monitoring committee (IDMC) recommended that a phase 3 trial involving an intravenous version of CR845 continue in patients with postoperative pain. While this continuation isn't necessarily an indication of CR845 succeeding, it demonstrates that the IDMC believes it could hit its primary endpoint: a statistically significant change in pain intensity over the 24-hour postoperative period. If approved, $200 million to $300 million in annual sales from postoperative pain aren't out of the question. And this could come on top of the drug's earlier successes in treating pruritus.
Wall Street may have written Cara Therapeutics off too soon, which makes it an intriguing small-cap stock for investors to get on their radars.