Cannabis, grass, marijuana, pot, weed. Whatever you want to call it, many cannabis industry stocks are red-hot. Several companies are racing to serve the medical cannabis markets in countries across the world. Some are targeting the recreational market. Others are developing cannabinoid drugs. And that presents opportunities for investors.
The bad news, though, is that many cannabis stocks aren't good alternatives. They're either ultra-risky penny stocks or in danger of negative consequences from a crackdown by the U.S. government, which still outlaws the use and sale of cannabis products. However, some stocks are worthy of investors' attention. Here's why Aurora Cannabis (ACB -0.92%), Canopy Growth (CGC 3.27%), GW Pharmaceuticals (GWPH), Insys Pharmaceuticals (INSY), and MedReleaf (NASDAQOTH: MEDFF) are top cannabis stocks to consider buying now.
Aurora Cannabis ranks as one of the biggest suppliers of medical cannabis in Canada. The company also is moving forward to provide medical cannabis in Australia and Germany, with an eye toward further international expansion.
It's been a fantastic year for Aurora Cannabis stock so far in 2017. Shares have soared over 260% year to date. This momentum has been fueled by three key factors. First, the medical cannabis market in Canada has grown tremendously. In its last quarter, Aurora reported year-over-year revenue growth of 39%. Second, like its peers, Aurora eagerly anticipates legalization of recreational marijuana in Canada next year. This presents a huge additional market for the company.
Another major reason behind Aurora's phenomenal rise is the company's acquisition strategy. Aurora recently launched an attempt to acquire smaller marijuana grower CanniMed Therapeutics. If the deal goes through, the combined companies would have five cultivation facilities (and more coming) with the capacity to produce 130,000 kilograms of cannabis each year.
It's a similar story for Canopy Growth. The company currently stands as the No. 1 medical cannabis provider in Canada in revenue and market cap. Canopy Growth has also aggressively expanded internationally, with subsidiaries or partners in Australia, Brazil, Chile, Denmark, Germany, Jamaica, and Spain.
Like Aurora Cannabis, Canopy Growth has enjoyed a tremendous year. The stock is up nearly 120% so far in 2017. Strong sales growth of medical cannabis was a big reason for this impressive performance. Canopy reported its revenue in the last quarter more than doubled that of the prior-year period. The company is poised for even greater growth with the legalization of the recreational use of marijuana in Canada in 2018.
Major alcoholic beverage maker Constellation Brands announced in October that it was buying a 9.9% stake in Canopy Growth for $245 million. Constellation is also partnering with Canopy to market a cannabis-infused beer. This endorsement by a huge company gives Canopy Growth a stamp of approval that no other cannabis stock currently has, which should make Canopy Growth especially intriguing to investors.
GW Pharmaceuticals ranks as the largest pure-play cannabis stock, with a market cap of over $3 billion. The biotech focuses on development of cannabinoids and recently completed its submission for U.S. regulatory approval of cannabidiol drug Epidiolex.
It's been a topsy-turvy year for GW Pharmaceuticals stock. The biotech's share price has swung up and down by double-digit percentages several times, but is now up over 10% for the year. Some of this volatility stemmed from the potential for another drug to become a threat to Epidiolex.
Still, the chances of approval for Epidiolex in the treatment of Dravet syndrome and Lennox-Gastaut syndrome (LGS) appear to be pretty good. GW conducted three late-stage clinical studies, all of which showed solid efficacy for the company's lead product. And although there are some drug-drug interactions with Epidiolex, I suspect that they will probably be addressed on the product label rather than holding up approval.
Assuming it does win approval, Epidiolex should succeed commercially. It's hard to accurately predict peak annual sales for the drug, but somewhere in the ballpark of $800 million to $1 billion doesn't seem out of the question. Based on an optimistic view of the biotech's prospects, GW Pharmaceuticals stock should have plenty of room to go higher.
Insys Pharmaceuticals is something of an oddball in this group of cannabis stocks. Like GW Pharmaceuticals, Insys is a biotech with a focus on cannabinoid drugs. However, unlike all of the others on the list, Insys stock has tanked in 2017. Shares are down more than 40% year to date.
What's behind this huge plunge -- and why should investors still consider Insys? First, the bad news. Sales for Insys' current lead product, Subsys, continue to fall in the midst of national concerns about the opioid epidemic. Insys' founder (who is no longer with the company) was arrested on charges related to past marketing practices for Subsys. And Insys is itself the target of federal and state probes into its marketing of Subsys.
Better news could be in store for Insys, though. The stock appears to have hit bottom. Even a big third-quarter earnings miss didn't affect the share price much. Insys expects Subsys sales to stabilize. The company recently launched cannabinoid drug Syndros and thinks sales will slowly grow until they reach around $200 million annually. Insys is also working to settle the investigations into its past marketing practices and appears to have gotten its house in order. With a market cap of less than $400 million, any positive developments could lead to a huge rebound for this beaten-down cannabis stock.
MedReleaf is yet another Canadian medical cannabis stock to keep your eye on. It has the second-highest sales and the fourth-highest market cap among the medical cannabis stocks. MedReleaf stock is also one of the newest on the market, with the company conducting its initial public offering in June.
While MedReleaf stock's performance so far in 2017 lags behind Aurora Cannabis and Canopy Growth, year-to-date gains of nearly 90% aren't bad at all. The company's sales growth hasn't been at the level of its peers, in part due to reliance on sales of dried cannabis, which isn't as lucrative as cannabidiol (CBD) products. MedReleaf has taken steps to shift more toward CBD, though.
All of the positive dynamics going for Aurora and Canopy Growth also apply to MedReleaf. Medical cannabis markets are growing across the world. Canadian legalization of recreational cannabis should be just around the corner. And if other large beverage companies decide to follow Constellation Brands' lead, MedReleaf could be an attractive partner.
I think all five of these cannabis stocks should beat the market in 2018. However, definitely consider carefully before jumping aboard any of them.
All three of the Canadian cannabis stocks are priced at astronomical levels based on their current sales. While they should enjoy tremendous growth, any delays in legalization of recreational marijuana in Canada would hurt in a major way.
The two biotechs, GW Pharmaceuticals and Insys, face different risks. It's possible that Epidiolex fails to win approval. If that happens, GW stock will no doubt crater. Insys could be required to pay a much larger amount to settle with the U.S. Department of Justice than expected. There's also a chance that Subsys sales won't stabilize.
Investing in anything comes down to risks versus rewards. The potential rewards of buying these cannabis stocks are high, in my view. But so are the risks.