The marijuana industry is growing like a weed. This cheesy but apropos description perfectly encapsulates the double-digit percentage annual growth expectations for the pot industry throughout North America. Depending on your source, the legal weed industry is slated to grow by 23% to 35% annually over the next couple of years, and that's a growth rate that investors simply can't ignore.
Investing in pot stocks comes with huge risks
Unfortunately, even with this incredibly consistent growth rate, investing in the legal weed industry is extremely risky. For example, recreational cannabis remains illegal in every country in the world, except for Uruguay, and medical pot is only legal in a relatively small number of countries. Operating a business that's technically illegal in most countries is a major gamble, and it often comes with a number of unexpected consequences, as seen with U.S. pot businesses.
Within the United States, businesses involved in the legal pot industry often have little or no access to basic banking services. This is because financial institutions report to the Federal Deposit Insurance Corporation (FDIC), and the FDIC is a federally created entity. Since marijuana is a schedule I (wholly illegal) substance in the U.S., any bank assistance to pot companies could be construed as a criminal and/or fineable offense.
Profitable weed businesses are also unable to take normal corporate income-tax deduction, per U.S. tax code 280E. Any business that sells a federally illegal substance is subject to 280E, pushing their effective income-tax rates to as high as 70% to 90%.
Raising capital can often be a concern, too. Since most marijuana stocks aren't profitable, or are at best generating marginal EBITDA (earnings before interest, taxes, depreciation, and amortization), common stock offerings or bought-deal financings are common. These are deals that can lead to immediate or long-term dilution via an increase in the outstanding share count. It's sort of a silent killer for pot stock investors.
The top marijuana stocks for aggressive investors to consider
Put plainly, marijuana stocks are only geared for the most aggressive investors who aren't afraid of risk and fully understand that their investment could lose significant value if the cards don't fall their way. If you'd classify yourself as an aggressive investor, and you're tempted by the high growth of the legal weed industry, then here are the best marijuana stocks worth considering for your portfolio.
Cannabis Wheaton Income Corp.
If you want to dip your toes into pot stocks, but don't have the slightest clue where to begin among the sea of growers, you might consider digging into the world's first royalty marijuana stock, Cannabis Wheaton Income Corp. (CBWTF -7.13%).
Rather than handling the day-to-day operations and costs of planting, growing, maintaining, and distributing cannabis to retailers, Cannabis Wheaton acts as something of a middleman financier. For growers aiming to expand their existing operations, Cannabis Wheaton supplies cash upfront to make that happen. In return, Cannabis Wheaton receives a percentage of production at a well-below market rate. Upon taking delivery, the company can then turn around and sell this dried cannabis at market rates and pocket the difference as profit. Initial estimates suggest that its internal rate of return on its roughly 15 deals should be at least 60%.
As it stands now, assuming all of its licensed growers meet production expectations, the company could receive and sell 230,000 kilograms of dried cannabis by 2019. That would likely place it among the top three sellers of cannabis in Canada at this point, with Canada on track to legalize recreational weed by this coming summer.
The risk, of course, is that the royalty business model is highly capital intensive in its early stages, so the company will really need demand to rocket out of the gate, and for its partners to meet their end of the bargain, for it to be successful.
If you're looking more specifically at cannabis growers, then I'd steer you toward considering OrganiGram Holdings (OGI -0.87%).
OrganiGram is what you'd call a modest grower among a handful of giants. Whereas around five or six Canadian growers could top 100,000 kilograms of dried pot production by 2019, OrganiGram's objective right now is expanding its estimated output to 65,000 kilograms at its Moncton facility in New Brunswick. What's unique about OrganiGram is that it's chosen to expand production at one site, rather than opening new facilities throughout Canada. Though that might narrow the scope of its market a bit due to shipping costs, it'll actually reduce its growing costs significantly relative to many of its peers. That could be a major margin boost for the company.
Speaking of margin boosts, OrganiGram has also embraced the push away from dried cannabis and toward higher margin cannabis oils. In its most recently reported quarter, it announced sales of 419,000 ml of cannabis oil, well more than the 178,000 ml it sold in the sequential fourth quarter. Since these oils are a significantly higher priced product, it should help OrganiGram push into the black quicker than its peers.
The downside, of course, is that it's a modest-sized fish in a sea of piranhas. That could mean a healthy buyout premium for the company, or it could mean getting pushed aside as the larger growers bully OrganiGram around. I, for one, believe it could be the most attractive pot stock based on its fundamentals, but it'll definitely need to execute flawlessly to realize substantive gains from here.
Aggressive investors would also be encouraged to take a closer look at drug developer Cara Therapeutics (CARA -3.28%). However, it should be noted that at this point in time the company's lead drug in development, CR845, a kappa opioid receptor agonist being targeted at pain and pruritus (itching), has absolutely nothing to do with cannabis. CR701, a preclinical CB-receptor agonist, is where Cara gets its loose association with pot stocks.
The obvious risk here is that Cara has no approved therapies on pharmacy shelves, and statistics show that a clinical trial has a far greater chance of failing than hitting the mark. Still, its lead drug, CR845, has shown moments of promise that could make Cara a steal for investors.
Last year, Cara Therapeutics nosedived after a phase 2b study involving CR845 for osteoarthritis (OA) of the hip or knee delivered mixed (but mostly negative) results. Of the three doses tested (1 mg, 2.5 mg, and 5 mg), the two lower doses missed the mark, while the highest dose only found success in OA of the hip. That was a disappointment considering that pain indications are a more profitable long-term path for Cara than pruritus.
Nonetheless, CR845 was recommended by an independent data monitoring committee in June 2016 to continue in a phase 3 study for postoperative pain, and the drug has been turning heads in a good way in terms of treating chronic kidney disease-associated pruritus in clinical studies. Further, Cara could choose to focus solely on OA of the hip, or simply test higher doses, in another midstage study, potentially expanding CR845's future use. There are pathways to success for Cara's lead drug, and that could make it an intriguing buy.