Legal marijuana is among the fastest-growing industries on the planet right now. Sure, there's plenty of talk about cryptocurrencies and blockchain, but in North American alone legal weed sales surged by 33% in 2017 to $9.7 billion. By 2021, cannabis research firm ArcView, in partnership with BDS Analytics, estimates North American sales may rise to $24.5 billion. For mathphobes, that's an astounding compound annual growth rate of 28%.

Also exciting investors is the support behind cannabis. Though once considered a taboo topic, numerous national polls from the likes of Gallup, Fox News, CBS News, Quinnipiac University, and Pew Research, have demonstrated overwhelming support for legalization, and even stronger support for legalizing medical marijuana. 

A man smelling the cannabis leaves from a potted plant.

Image source: Getty Images.

Investor intrigue has also been swelling given the likelihood that Canada will legalize the sale of recreational cannabis to adults over the age of 18 this summer. It would, in the process, become the first developed country in the world to do so, and open the door to $5 billion or more in annual sales.

Add all of this together and you'll have a pretty good picture of why marijuana stocks were virtually unstoppable in 2016 and 2017.

The top-performing pot stocks in Q1

Through the first quarter of 2018, however, they've proven fallible. Concerns have creeped in about the possibility of domestic oversupply in Canada and what it might do to margins. Investors also balked at Canada pushing the first sales of adult-use weed (assuming passage of the Cannabis Act this June) out to August or September from July. Given the premiums bestowed on pot stocks, it's not surprising to see investors act impatiently and sell these volatile equities.

As a result, just three marijuana stocks ended the first quarter higher. Let's have a look at what pot stocks had investors seeing green in Q1.

White plastic bottles with $20 bills sticking out of their tops while on an assembly line

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1. Kush Bottles: Up 22%

Interestingly enough, the best marijuana stock of the quarter is a company that isn't involved in the cultivation of the plant: Kush Bottles (KSHB). Kush is a small-cap pot stock that's focused on manufacturing and developing pop-top bottles and child-resistant containers for growers of all sizes. It also helps growers with branding solutions.

So, why did Kush catapult higher by 22% why nearly all other growers sunk by a double-digit percentage? The answer probably lies with recently outlined packaging guidelines by Health Canada. These guidelines note that, upon passage of the Cannabis Act, packaging should be child-resistant and tamper-evident, as well as contain health warnings on a bright yellow background. In essence, it speaks to the packaging needs and customization that Kush Bottles specializes in. 

What's more, Kush Bottles reported decent operating results in mid-January. Its fiscal first-quarter report showed a 258% year-over-year increase in sales to $8.85 million, and the company reversed a year-ago loss of almost $162,000 to turn a nominal profit of nearly $95,000. While that still rounds to $0.00 per share, the simple fact that it's already profitable and Canada's recreational weed demand hasn't even hit yet is a positive sign. 

To be clear, Kush Bottles isn't exactly "cheap." Like most marijuana stocks, it's been diluting investors to raise cash, and its business is still in the relatively early stages. But when talking about the most impressive pot stocks in Q1, it might take the cake.

An indoor commercial cannabis grow farm.

Image source: Getty Images.

2. Canopy Growth Corp.: Up 10%

Despite nearly all growers wilting during the first quarter and ending lower, Canopy Growth Corp. (CGC -2.43%), the largest pot stock by market cap, bucked that trend and moved 10% higher. Unlike Kush Bottles, it had nothing to do with the company's reported operating results. Instead, investor optimism appears tied to the company's superior vertical and horizontal growth channels.

You see, when it comes to acquisitions, partnerships, and annual production potential, no grower holds a candle to Canopy Growth. It currently has seven production facilities spanning 665,000 square feet, and is in the process of constructing or developing greenhouses on 3.7 million square feet of land in British Columbia. Even with the company tight-lipped on its annual production potential, there appears to be a path to 300,000 kilograms here, which would make it Canada's largest domestic grower. 

Canopy has the most recognized cannabis brand in the country, Tweed, along with a distribution channel that its peers marvel. It has brick-and-mortar retail outlets to sell cannabis, as well as the online means to do so. It also sold a 9.9% equity stake to spirits giant Constellation Brands for about $190 million that could give Canopy access to Constellation's distribution channels and marketing genius. 

Like Kush Bottles, Canopy Growth isn't inexpensive. In fact, it could be one of the last major growers to turn a profit given that it's reinvesting its operating cash flow back into its business. Still, there's a premium to be had for its partnerships and production potential, and investors seem perfectly OK paying for it, for the time being.

A cannabis bud atop a doctor's prescription pad.

Image source: Getty Images.

3. Cara Therapeutics: Up 1%

Finally, drug developer Cara Therapeutics (CARA 11.74%), which has a pretty loose association with cannabis stocks, managed to scrape and claw its way to a 1% gain during the first quarter.

Cara Therapeutics' clinical pipeline revolves around Korsuva (previously CR845), a kappa opioid receptor agonist that has nothing to do with cannabis. It also has an oral, preclinical medicine known as CR701 that's a CB receptor agonist, and is where it gets its ties as a "marijuana stock."

When it comes to biotech stocks like Cara, investors thrive on clinical data – and it was an overall quiet quarter for that. Back in late January, Cara initiated a pivotal phase 3 trial of injectable Korsuva in hemodialysis patients with chronic kidney disease-associated pruritus (itching). Other than this initiation, it was an unexciting quarter. 

The real battle that investors have to weigh is how well Korsuva will fare in pain indications. Having been targeted at pruritus and pain in clinical trials, it's been effective in the former and delivered mixed results for the latter. Unfortunately, pain is the premier indication of the two since it has a larger patient pool and much more profit potential. There's still hope with a late-stage trial in post-operative pain being recommended to continue by an independent data monitoring committee last year, but the future of Korsuva in treating pain isn't nearly as robust now as it was say 18 months ago. 

While I do believe it offers an intriguing option for aggressive investors to consider, I'd also remind folks that its valuation is very much dependent on how it performs in ongoing pain-based studies.