The tide has shifted in the marijuana industry. What was once a taboo topic that few discussed is rapidly becoming a legitimate industry that consumers stand behind and politicians promote.
For example, national pollster Gallup, which has been keeping track of Americans' perception of pot for nearly five decades, found in October 2017 that an all-time record 64% of respondents now favored the idea of legalizing weed nationally. Support for medicinal marijuana is also exceptionally strong, with the independent Quinnipiac University finding in August 2017 that 94% supported legalizing medical cannabis, compared with a minuscule 4% who opposed the idea.
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Marijuana stocks to consider for the long term
This shift in consumer opinion, along with rapidly growing legal pot sales, is a big reason many marijuana stocks have doubled or tripled in value over the trailing year. However, there's a big difference between short-term industrywide euphoria and true long-term value creation. If you're looking at the longer-term potential of cannabis, then the following three pot stocks are worth your consideration.
Aphria
Even though the U.S. market could dwarf Canada in total sales, there's virtually no chance that the U.S. federal government is going to change its Schedule I classification on pot as long as Donald Trump is president and Jeff Sessions is attorney general. This means Sessions will continue to wage war on the marijuana industry in the U.S., opening the door for Canada to be the blueprint of success for the weed industry.
Right now, Canada appears to be putting the final touches on legislation that would green-light recreational cannabis use by July, and in doing so it would become the first developed country in the world to legalize adult-use weed. Early estimates suggest that recreational pot could add another $5 billion in sales a year, once ramped up. Medicinal marijuana has been legal in Canada since 2001.
Aphria (NASDAQOTH: APHQF) is slated to be one of the largest producers of cannabis in Canada. Its four-phase project, which is costing the company in excess of $100 million, is fully funded and on track for completion by late January 2019. Once finished, Aphria will have 1 million square feet of growing capacity and the ability to generate 100,000 kilograms of cannabis per year.
Beyond its flagship organic expansion, the company has also been a busy bee on the acquisition and partnership front in recent weeks. A recently announced strategic partnership with Double Diamond Farms is going to result in 120,000 kilograms of cannabis production by January 2019. The partnership makes sense for Aphria, given that organically building out its 100-acre site to double its production would have taken until 2020 to complete. Doubling its production a year earlier could allow it to capture that all-important early recreational market share.
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Even more recently, Aphria announced the $670 million acquisition of Nuuvera, which has its medical cannabis footprint in numerous foreign markets. The move will allow Aphria, one of the few growers given the OK to export its dried cannabis to foreign markets that have legalized medical marijuana, to expand to 11 total markets, thus diversifying its revenue stream, and minimizing the geopolitical risk associated with selling an illegal substance.
As the icing on the cake, Aphria's management team really focuses its efforts on maintaining profitability. It's very possible Aphria could struggle in the next couple of quarters as a result of these acquisition costs, but it's one of just two pot stocks to have generated a profit in each of the past two years. It's worth a look for long-term-minded marijuana stock investors.
Cara Therapeutics
Another marijuana stock that certainly has caused some short-term indigestion among investors, but could be quite promising for patient investors, is Cara Therapeutics (CARA +0.00%).
Cara is a clinical-stage drug developer whose pipeline is primarily devoted to a kappa opioid receptor agonist, CR845, which is being targeted at treating pruritus (itching) and pain. Its association with the marijuana industry comes from the development of CR701, a preclinical compound that could one day be moved into human trials as an opioid-replacement therapy for the management of pain.
Cara's 2017 was a roller coaster for its investors, given that a critical pain study delivered mixed to negative results. Between the two indications of pain and pruritus, pain is considered to have a larger patient pool and be considerably more profitable over the long run. The phase 2b study in question examined three doses of CR845 (1 mg, 2.5 mg, and 5 mg) in patients with osteoarthritis (OA) of the hip or knee. Both of the lower doses failed to reach statistical significance, while the highest dose reached statistical significance only in regard to OA of the hip, where a 39% reduction in mean joint pain score was observed. This small success certainly wasn't what shareholders were looking for.
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But there are rays of light at the end of this tunnel. To begin with, the company's clinical trials involving chronic kidney disease-associated pruritus have been hitting the mark. Even though pruritus isn't the home-run indication Cara Therapeutics is looking for, it is an indication that could lead to recurring revenue and a push toward positive cash flow.
Second, Cara has options with its disappointing midstage study. Success in OA of the hip could allow the company to salvage something in the way of sales moving forward, especially with a statistically significant reduction in mean joint pain score.
Perhaps most importantly, an ongoing phase 3 study involving CR845 for postoperative pain was recommended to continue by the independent data monitoring committee (IDMC) in June 2017. Though this in no way means the experimental drug is successful, the continuation of this study implies that the IDMC believes it has a chance to hit its primary endpoint and is thus not inferior to the placebo.
In short, there's still a decent chance that CR845 could become a profitable drug for Cara Therapeutics and its patient shareholders.
Cannabis Wheaton Income Corp.
Finally, if you're looking for a marijuana stock to buy and hold that's really off the radar, consider digging into Cannabis Wheaton Income Corp. (CBWTF +3.17%), the first royalty cannabis company.
Getting its inspiration, and namesake, from Wheaton Precious Metals in the precious metals industry, Cannabis Wheaton isn't involved in the day-to-day operations of growing weed. Instead, it partners with growers and related businesses that are looking to expand their operations but don't have the financing to do so. Cannabis Wheaton then steps in and supplies the needed financing for expansion. In return, the company gets marijuana delivered by their licensing partner and pays well below market rate for it. This approach allows Cannabis Wheaton to sell the delivered pot at market rates and simply pocket the difference.
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According to the company, its average internal rate of return on its roughly 15 deals is expected to be around 60%. It's not hard to see why, either, with the company sporting a cost of goods sold per gram of just $2, and an average selling price of roughly $6.20 per gram.
Furthermore, the royalty model allows Cannabis Wheaton Income to act as a diversified investment, without the added fees associated with an exchange-traded fund or mutual fund. The company's production stake in 15 other marijuana businesses provides geographic and production diversity for shareholders and ensures that no single licensee in its portfolio could jeopardize its business model.
Cannabis Wheaton anticipates that it'll be receiving about 230,000 kilograms of dried cannabis for sale as of 2019. That would place the company among the top three sellers of dried cannabis and easily make it a force to be reckoned with. Though its expenses are up at the moment as it scrambles to forge licensing deals, its long-term future looks promising.
