This article was updated on March 8, 2017, and was originally published on July 10, 2015.

Here's a recipe for investing disaster: Buy penny stocks in a new market that many are claiming will soar in the next few years. Unfortunately, some could be headed for such a disaster with marijuana stocks. However, there are a handful of companies that bear careful scrutiny, in particular those focusing on serious medical marijuana research. Here's why GW Pharmaceuticals (NASDAQ:GWPH), Insys Therapeutics (NASDAQ:INSY), and Cara Therapeutics (NASDAQ:CARA) are three marijuana stocks that investors should watch.

Holding marijuna leaf with background of marijuana plants

Image source: Getty Images.

Excited about Epidiolex

GW Pharmaceuticals continues to stand out as one of the most viable investment plays in the marijuana space right now. The company's Sativex, a cannabis-based drug used for treating spasticity due to multiple sclerosis, is approved in 28 countries.

The main story for GW Pharmaceuticals, though, is with another cannabinoid -- Epidiolex.  The biotech reported positive results from two late-stage studies of Epidiolex in treating Dravet syndrome and another late-stage study targeting Lennox-Gastaut Syndrome (LGS). GW Pharmaceuticals plans to file for regulatory approval for the drug in both indications in 2017. 

Although the company isn't yet profitable, GW claims some financial positives that most other marijuana stocks can't. Thanks to Sativex, it is at least generating revenue. The company's cash position also looks pretty good, with nearly $445 million in cash and cash equivalents as of the end of 2016.  

Ready for launch

Insys Therapeutics' financial position looks even better than GW Pharmaceuticals, but not from any major contribution by marijuana-related products -- at least not yet. The company has been profitable for several years.  

Subsys, used for breakthrough cancer pain in opioid-tolerant patients, is driving Insys' revenue currently. Unfortunately, sales for Subsys are dropping. The big issue facing the company is that some payers refuse to cover Subsys.

Insys won approval from the U.S. Food and Drug Administration (FDA) for Syndros in July. Although the company has not commercially launched the cannabinoid yet while it waits on scheduling by the Drug Enforcement Agency (DEA), Insys believes that Syndros could reach peak annual sales of over $200 million.

Insys also has another marijuana-based drug in the pipeline. Cannabidiol is in a phase 2 study targeting treatment of severe pediatric epilepsy. 

Looking down the road

Cara Therapeutics doesn't have any products on the market yet, so the company's financial position isn't as solid as the other two on our list. And while Cara's pipeline includes cannabis-based research, the company's future isn't as tightly linked to the medical marijuana industry as either GW Pharmaceuticals or Insys.

Pain medication CR845 is Cara's lead candidate. The company expects to report results from a late-stage clinical study of the kappa opioid receptor drug in treating post-operative pain in the first half of 2017. The potential for CR845 is great, because the drug can relieve pain without causing the addictive qualities associated with many existing opioid drugs. 

It's worth watching Cara as a marijuana stock, though, because of its other pain drug. CR701 is a peripherally acting cannabinoid receptor agonist for which Cara owns full rights. The drug has shown considerable promise in pre-clinical testing. Cara could move CR701 into a phase 1 clinical study at some point. For the immediate future, however, CR845 will be the catalyst behind any stock movement for Cara.

Highs and lows

GW Pharmaceuticals and Cara Therapeutics have been huge winners recently. Both of the biotech stocks have more than tripled during the last 12 months. Insys Therapeutics, on the other hand, has lost a lot of its market cap due to the headwinds faced by Subsys. 

All three biotechs have catalysts on the way that could drive share prices higher. GW Pharmaceuticals should get a nice bump if Epidiolex wins approval. DEA scheduling will likely boost Insys' stock. Cara Therapeutics hopes to get good news from its late-stage study of CR845.

While many marijuana stocks could be in jeopardy if the Trump administration cranks up enforcement of federal laws in states that have legalized marijuana, GW Pharmaceuticals, Cara, and Insys are following the laws to a T. All three stocks could see even better days ahead. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.