Marijuana Stocks for 2015
Time to Buy Marijuana Stocks?
Marijuana has officially entered the mainstream of U.S. culture, and if you’re an investor looking for new opportunities, you need to be paying attention.
Case in point: the now-infamous “Three Grandmas” YouTube video, seen by 16 million viewers in the week it was released, that shows a trio of tipsy grannies toking on some ganja and loving every minute of it.
“I thought the video would be buried deep in the Internet and no one would find it,” said Dorothea, one of the “Ganja Grandmas” in the video. “I mean, who searches for videos with grandmas? Guess I was wrong. Every day the number of views just goes up.”
The video may well represent a watershed moment for the marijuana industry — one where acceptance for usage of the drug is clearly entering the American mainstream culture as more and more states legalize cannabis.
Voters in Alaska, Oregon, and Washington, D.C. okayed the legal use of the drug in 2014 after voters in Washington State and Oregon approved ballot measures legalizing cannabis in 2012.
“Legalizing and regulating marijuana will bring the nation's largest cash crop under the rule of law, creating jobs and economic opportunities in the formal economy instead of the illicit market,” says DrugPolicy.org, an industry advocacy group that supports legalized marijuana use across the U.S.
“Scarce law enforcement resources that could be better used to protect public safety would be preserved while reducing corrections and court costs. State and local governments would acquire significant new sources of tax revenue from regulating marijuana sales.”
That all means more and more opportunities for investors to leverage a brand new pipeline for portfolio cash, with no shortage of places to go on Wall Street to make hay on the marijuana boom.
And a “boom” it is, with legal marijuana usage set to grow by 60% in 2014, resulting in a burgeoning new industry with $2.5 billion in annual revenues.
But that’s just for starters. With only a handful of states green-lighting cannabis usage and no approval at all yet from Uncle Sam on the federal government level, the upside for marijuana going forward is huge, with some estimates predicting that the growth of recreational marijuana could quadruple by 2014.
Volatility in Cannabis Stocks
With marijuana gaining traction culturally and financially, what’s the best move for interested investors in 2015?
There’s no shortage of volatility, so the first watchword is caution.
For example, GW Pharmaceuticals (NASDAQ: GWPH) shot up 1,100% in value in a roughly one-year period between July 2013 and July 2014 but fell by 30% since then. Other newly “mainstream” pot stocks, like Medbox (OTC: MDBX), experienced a similar rise and fall over the same period.
Industry ETFs proved just as volatile.
Take the Viridian Cannabis Industry Report and Stock Index, which exploded in 2013 with a 146% performance gain. The first three quarters of 2014 saw similar results, but it fell in late 2014.
From the fund managers, who track 70 publicly traded companies in the legal cannabis sector (including cultivation and retail, consumption devices, and physical security):
The index saw 147.1% gains for the first three quarters of 2014, significantly outperforming the same period for the Dow Jones Industrial Average (up 2.8%), S&P 500 (up 6.7%), Nasdaq (up 7.6%) and the Russell 2000 (down 5.3%). This performance follows a strong 2013, when the Index of cannabis stocks gained 146.6%, outperforming comparative indices.
However, all gains so far this year were made in the first quarter, which saw the Index rise by 838.4%. The next two quarters both showed declines. “We believe this reflects hype and promotion in the public Cannabis Sector in 2013 through early 2014, and a subsequent, much needed ‘return toward fundamentals’ in the sector,” said Scott Greiper, president of Viridian Capital & Research, a provider of strategic advisory and investment banking services to cannabis-related companies and investors.
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This Pot Stock Could Pop
Even so, analysts love the outlook for more relatively stable cannabis plays. GWPH is a good example — analysts see the company’s stock price rising to $119 in 2015.
Shares of the company were down 4% in the third quarter of 2014, but company executives remain bullish on the sector and on GW Pharmaceutical’s short- and long-term future.
On a recent conference call covering third quarter performance, company executives pointed to a big opportunity in one specific sector and a bevy of capital funding plays in the recent quarter.
“It is no exaggeration to say that GW's business has transformed over the last year, principally as a result of the rapid advance of our Epidiolex program to treat orphan syndromes in the field of childhood epilepsy,” company officials say. “During 2014, we have raised significant capital from US investors in support of this program, commenced treatment of approximately 200 children, obtained encouraging clinical data, and commenced formal clinical development of Epidiolex in the United States.”
The company expects cash outflow to rise by $78 million in the next quarter (mostly related to Epidiolex) and capital expenditures to rise by $35 million — both good signs for a young company with a potentially hot product in the pipeline.
But GW, along with Medbox and other fledgling marijuana stocks, suffers the same growing pains of most companies in young industries seeking financing and dealing with onerous clinical trial issues. Limited financing, no “brand name” companies in the sector (yet, anyway), and some overpricing concerns call for careful consideration for investors over the short term.
Still, the long-term outlook for marijuana stocks and funds is optimistic based on industry growth rates, which are skyrocketing.
“The legal cannabis industry is growing rapidly — likely reaching $10 billion in annual activity by 2018 — and so are the number and size of public companies serving it,” says Greiper. “But we see a shake-out coming, as out-of-control valuations come down to reality, questionable operators are forced from the industry and the real winners in the sector become apparent. This will also accelerate the movement of more traditional financial institutions and investors into marijuana stocks.”
Maybe that’s the best call for so-called “green gold” investors. Wait a bit and see which companies flourish and which ones wither on the vine in 2015, while voters sort out which states add to the legal marijuana rolls in the next few years.
Our verdict? No doubt marijuana stocks are growth stocks. But they still need some seasoning before they can really jump out of the gate.
Until next time,
Brian O'Connell for Wealth Daily
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