Marijuana Stocks: Valuations -- and Why Investors Are Paying Massive Premiums

What can we learn from this chart?

1. Canadian-listed marijuana companies can get an earnings boost due to the accounting standard they use 

The Canadian companies that have an asterisk next to their price-to-earnings ratios need special explanation -- and this is a topic that all marijuana investors should understand. These four companies have reported positive net income, or earnings, over the last year. However, investors can't consider their earnings equivalent to the earnings posted by companies listed on major U.S. stock exchanges. That's because the Canadian companies' earnings can get a boost from using international financial reporting standards, or IFRS, the accounting standard adopted by Canada and many other countries around the world. Companies listed on a major U.S. stock exchange use generally accepted accounting principles, or GAAP. 

My colleague Sean Williams provides an in-depth explanation of how companies that use IFRS standards account for "biological assets," which include marijuana crops. The bottom line is that U.S. investors should disregard the reported earnings of Canadian-listed marijuana companies and focus on their reported operating income -- and, of course, cash flow.

This is an issue that's on track to at least diminish significantly. Canadian marijuana companies are increasingly listing on the New York Stock Exchange (NYSE). Aurora just began trading on the NYSE on Oct. 23, and Aphria recently filed to list on the NYSE.

2. Innovative Industrial Properties: A unique company that's profitable and pays a dividend 

San Diego–based Innovative Industrial Properties is not only profitable from a GAAP basis, it also pays a dividend, currently yielding 3.5%. That attractive dividend is thanks to the company being organized as a real estate investment trust (REIT), as REITs are required to pay out at least 90% of their income as dividends in exchange for preferential tax treatment. 

Image source: Getty Images.

Innovative Industrial Properties buys marijuana growers' properties -- it currently has nine in its portfolio -- and then leases them back to them. This is a particularly important service in the cannabis industry because companies directly involved in this space can have a tough time accessing capital from traditional sources, such as banks. This stems from the fact that marijuana is illegal on a federal basis in the U.S.

3. GW Pharmaceuticals, Auxly, and KushCo also have unique business models

GW Pharmaceuticals, based in the U.K., was the first mover in producing prescription drugs from cannabinoids found in the cannabis plant. It sells Sativex, for alleviating pain and other symptoms of multiple sclerosis, in many countries, though not in the U.S. Earlier this year, the company's Epidiolex received approval from the U.S. Food and Drug Administration for treating two forms of epilepsy. This marked the first time the FDA has given the green light to a drug derived from the cannabis plant.

Like Innovative Industrial Properties, Auxly Cannabis and KushCo Holdings are considered "ancillary" players in the marijuana market because they don't come into contact with cannabis. Toronto-based Auxly is a commodity streamer, which places it in the financing business. It operates in a way similar to other commodity streamers in that it contracts with marijuana growers to buy a portion of their future crop at a preset price and then resells that crop once it's produced. 

KushCo (formerly Kush Bottles), based in California, is primarily involved in providing packaging solutions to the marijuana industry. It received a major tailwind a few months ago when Health Canada issued a set of strict packaging and labeling regulations that companies have to follow if they want their product on dispensary shelves.

How big is the potential global marijuana market?

Marijuana stocks' valuations have soared because the market is expected to grow rapidly. Worldwide spending in 2017 on legal cannabis is pegged at about $9.5 billion by ArcView Market Research and BDS Analytics. Wall Street expects the new Canadian adult-use legal marijuana market to be worth at least $5 billion once it's fully up and running. So you can see why marijuana stocks partied upon last summer's passage of the Canadian Cannabis Act: It potentially expands the near-term global market size for legal cannabis by up to about 50% or more.

But that's only the start. Global spending on legal marijuana is projected to soar from $9.5 billion in 2017 to $32 billion by 2022, according to the same source as previously noted. That's a brisk 27.5% compound annual growth rate (CAGR).