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3 Marijuana Stocks That Could Go Up in Smoke

By Motley Fool Staff - Feb 21, 2015 at 1:01PM

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Marijuana stocks have been on a tear, but risk remains high for them.

Source: Flickr user Matthew Kenwrick

The potential to use marijuana as a treatment for various diseases has captured the attention of doctors, patients, and investors, but that doesn't guarantee marijuana stocks will keep going higher. In fact, there are plenty of reasons why marijuana stocks could stumble. Read on to learn why our Motley Fool experts think that these marijuana stocks could see their plans go up in smoke.

Dan CaplingerAmong marijuana stocks, GW Pharmaceuticals (GWPH) has gotten a huge amount of publicity, in large part because of its 63% rise in 2014 on the heels of having nearly quintupled during 2013 after its initial debut. The company specializes in developing therapies based on cannabinoid compounds derived from marijuana plants, and GW Pharma has long believed that these compounds can bring positive effects in treating cancer, epilepsy, and other serious conditions.

So far, GW Pharma hasn't had the sales success that investors will want to see from the company in the long run. That's not surprising for a biopharmaceutical company with a healthy pipeline of promising drugs, but it does mean that GW Pharma is as yet an unproven prospect for investors. The company has ample cash to survive for a long time, so further capital raises aren't likely to dilute shareholders in the near future. Yet until GW Pharma can verify its promising early findings -- and more importantly, convince regulators that any harmful effects from compounds derived from a substance that is still classified as a Schedule 1 drug by the Drug Enforcement Agency are worth the potential benefit -- the stock will have some risk of going up in smoke.

Todd Campbell: Although Insys Therapeutics (INSY) has a pipeline that doesn't rely solely on medical marijuana, it is researching the use of CBD as a therapy for some rare forms of epilepsy and as a treatment for brain cancer.

That research is pretty early stage and that means there are plenty of things that could go wrong. Investors should remember that 90% of therapies that enter human trials end up in the dustbin, instead of on pharmacy store shelves. That could mean that the odds are stacked against Insys' success in ushering its CBD drugs through clinic and to market.

As a result, investors should consider Insys for other reasons instead. For example, I like Insys because it already markets Subsys, a sublingual opiate spray that saw its sales grow 105% year over year to $58 million in the third quarter. Thanks to Subsys, the company is debt free and has plenty of financial firepower to pursue pipeline opportunities without diluting investors. In my view, that suggests that even if the company's CBD research programs go up in smoke, the company won't. 

Brian Orelli: Rather than pick an individual stock, I'll pick an entire class you should stay away from: penny stocks that sell marijuana.

Unlike GW Pharma or Insys, which are both legitimate companies trading on the NASDAQ with market caps above $1 billion, most companies selling marijuana (as opposed to marijuana-derived drugs like GW Pharma and Insys) trade over the counter.

Not trading on one of the major exchanges introduces all kinds of problems for investors -- like low volumes that make it hard to get a good price to buy and sell -- but from a "potential to go up in smoke" perspective, the lack of required disclosures for companies trading over the counter makes it really hard for investors to know how stable the company is.

Trading in one company, which I won't even mention by name since it trades for less than a nickel per share, was suspended last year by the SEC because the agency was worried about "accuracy and adequacy of information in the marketplace" and "potentially manipulative transactions" in the company's stock.

Even if you can find a marijuana-selling company of legitimate size with disclosures you feel comfortable with, the company is still tied to the political winds. The current federal government has decided that it isn't worth prosecuting people and companies following state laws even if it's still a federal crime, but that doesn't mean that things won't change in the future.  

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