Few investors are seeing green like those of the marijuana industry. Over the past two years, many of the largest pot stocks by market cap have surged higher by more than 1,000%.

Fueling this valuation surge has been a combination of rapidly rising sales, as well as an ongoing shift in the way the public views weed. For instance, in the U.S., we've had five national polls over the trailing year all find overwhelming support for legalizing cannabis. Meanwhile, cannabis research firm ArcView is projecting North American legal marijuana sales will grow from $9.7 billion in 2017 to $24.5 billion by 2021. That's growth investors simply can't ignore.

A jar of cannabis tipped over onto a small pile of cash.

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Marijuana stock valuations are through the roof

As a result, premiums for some of the largest marijuana stocks have catapulted through the roof. For instance, Aurora Cannabis (ACB -3.37%), has a trailing price-to-earnings ratio in excess of 535 and is expected to lose money in 2019 as it throws most of its capital at expanding its production capacity. With Canada on the verge of legalizing recreational pot by this summer, a huge market is up for grabs, and Aurora Cannabis is aiming to claim its share. At the moment, Aurora is on track to deliver 283,000 kilograms in fully funded production, which probably ranks it as No. 1 or No. 2 in annual production. Clearly, investors are expecting its top-tier production to eventually be worth the premium they're currently paying. 

The same can be said of Canopy Growth Corp. (CGC -4.29%), which is currently constructing or developing greenhouses on 3.7 million square feet of land in British Columbia. Canopy Growth may be able to produce more than 300,000 kilograms a year when fully ramped up, and it arguably has the best branding and distribution channels in the industry. Like Aurora, it's unclear if the company will be profitable in 2019 due to its heavy investment and reinvestment in capacity expansion. 

One marijuana stock, though, stands out from the crowd as a potential value, according to one metric: price to book value.

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This surprising pot stock is a book value bargain

Simply put, book value measures the total value of a company's assets, minus the company's outstanding liabilities, and it's often expressed on a per-share basis by dividing shareholder equity by the number of shares of stock outstanding. In particular, book value can be a useful tool in gauging the relative price of one equity compared to its peers or the broader market. Given that marijuana is illicit in all countries but one (Uruguay) at the moment, trying to compare pot stock book values to the broader market doesn't make much sense. But comparing marijuana stock book values to each other may shed some light on which stocks look like a bargain. 

Using data from Yahoo! Finance, here are the price to book values (as of March 27) for some of the largest marijuana stocks:

  • Aurora Cannabis: 8.44
  • Canopy Growth Corp.: 6.65
  • Aphria: 4.98
  • Cronos Group: 19.47
  • Emerald Health Therapeutics: 12.91
  • OrganiGram Holdings: 5.06
  • GW Pharmaceuticals: 4.49

You'll note that they're all valued at well over their book value per share, with perhaps cannabinoid-based drug developer GW Pharmaceuticals looking like the least bloated of them all.

However, we're missing a smaller player from the list above: Medical Marijuana Inc. (MJNA 11.54%). The developer of cannabinoid-based pharmaceuticals and hemp oil-based products has a price-to-book ratio of just 0.94! That looks to be a big-time bargain on a book value basis.

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Why Medical Marijuana Inc. looks like such a bargain

Scratching your head a bit? Don't worry, you're not alone. It's not often you find a marijuana stock with a $300 million market cap but yet a sub-$0.10 share price, valued below its price-to-book.

What exactly has pushed this price-to-book ratio so low, you ask? Look no further than Medical Marijuana's investment in clinical-stage cannabinoid-based drug developer AXIM Biotechnologies (AXIM 24.79%). As noted, Medical Marijuana is involved in hemp oil-based products, and is conducting its own research and development. But it's also quite the investor, with a 16.7% stake in Kannalife Sciences, an early-stage biopharmaceutical engaged in cannabinoid research, and a 22.67 million share stake in AXIM Biotechnology. This works out to about 40% of AXIM's outstanding shares.

When Medical Marijuana Inc. acquired its stake in AXIM, shares of the tiny biotech were going for just $0.23 per share. Within months, however, they'd exploded to near $20 a share, inflating Medical Marijuana's total assets as a result. As of the end of Medical Marijuana's fiscal third quarter, its positon was worth $151.9 million, up from just over $5.2 million when it first invested in AXIM. AXIM has been almost entirely responsible for pushing Medical Marijuana's equity higher over the trailing few quarters.

A person reaching for a neat stack of cash in a mouse trap.

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Here's why you should be wary of this so-called bargain

Unfortunately, book value doesn't take into account intangibles, such as AXIM's arguably bloated premium. Even though AXIM's share price has slid by roughly a third since Medical Marijuana Inc. reported its third-quarter results, it's still only working with a small number of clinical-stage programs. Despite 16 listed drug/trial combinations on its website, only three have moved into human trials. Just two of those are in mid-stage studies. In other words, it's going to take a while before AXIM has any chance of proving to Wall Street that it's worth its current premium -- AXIM has a negative book value. That means Medical Marijuana's AXIM "asset bump" could disappear just as quickly. 

Additionally, it's not exactly as if Medical Marijuana Inc. has been lighting it up in the financial column on its own. Even though it's been generating strong year-over-year sales growth (255% in Q3 2017), likely a result of neighboring Mexico legalizing medical cannabis in June 2017, the company is still losing money. It posted a $2.96 million net loss in Q3 2017, which drove its net comprehensive loss since inception (i.e., adding up every quarterly loss it's ever reported) to $82.3 million. That doesn't exactly sound like a bargain if AXIM doesn't deliver for Medical Marijuana. 

Understandably, I could be all wet and AXIM could deliver on its cannabidiol-release chewing gum and other unique therapeutics. But if I'm right, and AXIM still has a lot to prove to investors, Medical Marijuana's price to book value could provide false hope to investors.