Medical marijuana is one of healthcare's biggest stories this year and shares in marijuana companies are trading near all time highs, but not everyone is convinced that marijuana stocks should be in investor portfolios. So we asked three of our top analysts to weigh in on why they'd take a pass on owning marijuana stocks. Read on to learn why they believe investors should be cautious.
Todd Campbell: Biotech stocks are notorious for their pop-and-drop nature and that has me increasingly worrying that sales of drugs being developed by GW Pharmaceuticals (NASDAQ:GWPH) will fail to justify the company's recent sky-high valuation.
There's little doubt that there is a place for medical marijuana in treatment. Marinol, a synthesized formulation of the marijuana cannibinoid THC, has been used to help treat AIDS and cancer patients for decades. Instead, my doubt stems from whether demand for these drugs will allow them to become top sellers. For instance, GW Pharma's drugs for Dravet Syndrome and Lennox-Gastaut syndrome, which are based on the marijuana cannibinoid CBD, address a patient population measured in just the thousands and if GW Pharma's Sativex for cancer pain wins FDA approval, it's likely to be used only as a second line therapy; not as a first line choice.
That's not to say that I don't think there may be opportunities along the way for investors. I do. In fact, I think that investors may be undervaluing Insys Therapeutics(NASDAQ:INSY) promising new oral formulation of marinol. But I am worried that investors have put the cart in front of the horse when it comes to estimating the market potential for some of these other drugs.
John Maxfield: I hate to burst anyone's bubble that's high on marijuana stocks, but the reality is that I literally can't think of a worse industry to invest in right now.
Many of the companies have no revenue, are only tangentially related to the pot industry (and thus could very well not even participate in the industry's seemingly inevitable growth), and are led by individuals with less-than-questionable integrity and little experience running a business, much less a publicly traded corporation.
It isn't often, for instance, that FINRA urges prospective investors in a specific industry to check the Federal Bureau of Prisons Inmate Locator to determine if a company is being run by someone who has served time in federal prison. Why would it do so? According to the industry watchdog's press release:
"the CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history. The former CEO of a similar company was recently indicted for his role in a multi-million dollar mortgage-based Ponzi scheme."
It's for these reasons and others that multiple self-proclaimed marijuana stocks have seen trading in their shares suspended over the last two years. To share just one example, trading in GrowLife was suspended by the SEC earlier this year due to concerns "about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in [the company's] common stock."
Jordan Wathen: The marijuana industry may grow 10-fold in the next few years, but that doesn't mean it will necessarily result in riches for marijuana stock investors. Rarely does the growth of an industry create a proportionately large explosion in the wealth of its investors.
In a familiar example to Warren Buffett followers, I'd suggest that everyone acquaint themselves with the list of failed automotive manufacturers. Many of them were founded at the dawn of the automobile, well before 1910, but the number of survivors can be counted on your fingertips.
Back then it must have seemed so obvious that cars, not horses, were the future. They were faster for longer distances, and didn't need constant grooming or feeding. I'm sure many people rightfully assumed that every family, perhaps every person, would eventually own one. This growth should create tremendous wealth, one might reasonably conclude.
The same kind of thinking has permeated marijuana stocks today. Legalized marijuana is the future. Sales will be counted in the billions. But for investors, I'm confident that only a handful of businesses that spring from legalized marijuana -- maybe only 1 or 2% -- will be real winners. The rest will likely go to zero. Those odds confer images of gambling, not investing, which is why I stay away.
Todd, John, and Jordan do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.