Following a blazing hot January, marijuana stocks cooled a bit in February but still advanced for the month. Through the first two months of 2019, the Horizons Marijuana Life Sciences ETF, which holds around four dozen pot stocks at various weightings, is up 60%.
Wall Street and investors are counting on substantial sales growth in the cannabis industry this year as Canadian adult-use weed legalization ramps up, and new alternatives, such as edibles, infused beverages, and vapes, prepare to hit the market before the one-year anniversary of recreational weed's legalization on Oct. 17.
Of course, as with any new industry that's trying to find its footing, there are bound to be hiccups. Following a strong start to the year, here are three marijuana stocks I'd strongly suggest you avoid like plague in March.
During the latter part of February, cannabinoid-based drugmaker GW Pharmaceuticals (GWPH) was virtually unstoppable. Shares soared after the company reported operating results for the quarter that ended on Dec. 31. Since it launched the first-ever cannabis-derived drug to win approval from the Food and Drug Administration (FDA) at the beginning of November -- Epidiolex, a treatment for two rare types of childhood-onset epilepsy -- investors particularly coveted results from this quarter.
For the quarter, GW Pharmaceuticals recorded $4.7 million in net sales for Epidiolex, logged nearly 4,500 enrolled patients, and had more than 500 physicians doling out prescription since Nov. 1. The company also notes that filled prescriptions in January were about 150% higher than they were in December, and that a high percentage of the American public would be covered by insurance should they need Epidiolex, which has a list price of more than $32,000.
So what's not to like? How about only $4.7 million in sales over a two-month period for a therapy that has zero FDA-approved competition in Dravet syndrome, and a handful of considerably older approved therapies to compete with in Lennox-Gastaut syndrome? In just over a week, $1 billion has been added to GW Pharmaceuticals' market cap for a measly $4.7 million in sales. That makes no sense, especially considering GW Pharmaceuticals is still years away from turning a profit.
Making matters worse, Zogenix's (ZGNX) lead drug, Fintepla (previously ZX008), ran circles around the placebo in late-stage Dravet syndrome studies. To be crystal clear, Epidiolex and Fintepla have never gone head-to-head in a clinical study, so no line-in-the-sand comparisons of the two drugs can be made. But with Zogenix's lead therapy reducing seizure frequency from baseline by 55% in phase 3 studies, and Epidiolex delivering seizure frequency reductions of between 30% and 40% in its clinical studies, some clinical bias may present with physicians and patients preferring Fintepla. Zogenix's lead drug could hit the market later this year, ending GW Pharmaceuticals' reign as the only company to have a medicine approved to treat Dravet syndrome.
I'm not sure what's been in the punch lately, but I'm not drinking it. Avoid GW Pharmaceuticals in March.
Not to pick on cannabinoid drugmakers this month, but following an 84% climb in Insys Therapeutics (INSY) during February, there's no way it couldn't make this list.
Last month was certainly a bit of an anomaly for Insys, given that there wasn't any specific news event that explains its rally. Perhaps the most logical of explanations is that nearly a third of its float was held by short-sellers as of the end of January. Having such a large number of pessimists attached to a stock can sometimes lead to a short squeeze, whereby a rapidly rising stock sends short-sellers scurrying for the exit, thus pumping up the stock price even more as the cover their positions. My personal suspicion is this is what happened to Insys Therapeutics last month.
On a fundamental basis, Insys is a train wreck. The company has been spiraling downward since 2015, with allegations of wrongdoing obliterating investor, physician, and patient trust. The issue is that up to 80% of the company's sales of fentanyl-based breakthrough cancer pain drug Subsys were for off-label use and that, more specifically, Insys was effectively bribing or incentivizing physicians to prescribe Subsys for this off-label use. These allegations have led to the arrests of multiple executives, including the company's billionaire founder John Kapoor, a massive settlement between the company and the U.S. Department of Justice, and a huge haircut in Subsys' sales.
But the icing on the cake for Insys is what a dud Syndros has been. Syndros is the company's oral dronabinol solution that was launched as a treatment for chemotherapy induced nausea and vomiting, as well as anorexia associated with AIDS, in the summer of 2017. Dronabinol is a synthetic form of tetrahydrocannabinol (THC), the cannabinoid that gets a user high. Initial estimates put peak annual sales at north of $200 million. However, aggregate sales of Syndros are barely above $2.6 million through the first nine months of 2018.
With a huge legal overhang, Subsys sales still falling, Syndros flopping, and Insys potentially dangling its badly damaged opioid/fentanyl drug line for sale to raise cash, Insys is absolutely worth avoiding.
Check out the latest earnings call transcript for GW Pharmaceuticals, Zogenix, and Insys Therapeutics.
Last, but certainly not least, don't go anywhere near what I've proclaimed to be the most overvalued pot stock on the market, Cronos Group (CRON 0.52%).
I get it. Wall Street and investors are enamored with the fact that Cronos landed a $1.8 billion equity investment from tobacco giant Altria (MO 1.17%) in early December -- although the investment has yet to close. There's the possibility Altria and Cronos will team up to create new vape products, as well as Altria's providing its marketing and distribution expertise in key markets. Plus, with Altria soon to be owning a 45% stake in Cronos, which can be upped to 55% with the exercising of warrants it'll be issued, there's the real potential for Cronos Group to be bought out in the future.
But there's a problem with this thesis: Investors are overlooking deficiencies with Cronos in other areas.
For example, Cronos Group's Peace Naturals grow site and joint venture grow farm (Cronos GrowCo) should yield 40,000 and 70,000 kilos of respective peak annual output. Adding in smaller production sites in Israel, Australia, and at Original BC, and Cronos might struggle to yield 120,000 kilos a year. For a company with a market cap of well over $5 billion once its Altria deal closes, this valuation makes zero sense. Investors could purchase growers with similar peak production capabilities for less than a fifth of this cost. And to boot, these small-cap cannabis stocks should be considerably more profitable on a per-share basis than Cronos Group.
The company has arguably done a poor job of pushing into overseas markets. As noted, it does have cannabis grow sites in Australia and Israel, but lacks a large presence overseas. That's worrisome, because dried cannabis flower has shown a propensity to become an oversupplied and commoditized product over time. Should this happen, and if Cronos Group doesn't have adequate overseas sales channels in place, its margins are going to be slashed.
Still sporting a forward price-to-earnings ratio of more than 400, Cronos Group shouldn't be in your portfolio or on your buy list.