The Ugly Truth About Marijuana Stocks

The legal marijuana industry is expected to grow to $50B by 2026, according to analysts from Cowen & Co. In another study, ArcView Market Research says that the cannabis market is projected to grow over 25% annually through 2021.

These type of projections are what have gotten investors and traders excited about marijuana stocks. However, great excitement can often spill over to hype, and this is one sector that doesn’t lack in that department.

But you know what?

By using common sense and logic it’s not hard to tell the difference between reality and fiction.

Now, if the entire marijuana industry was a company, it’s 2026 projected revenues are nearly 10 times smaller than Walmart, which did $485.9 billion in 2016. Heck, competitors like Target Corporation and Costco did $69.5 billion and $118.7 billion in revenues in 2016.

marijuana stocks

Source: Google

 

New Marijuana Companies Pop Up Every Day

market wired

Source: Marketwired

lifespot capital

Source: Reuters

gvcl ventures inc.

Source: PR Newswire

However, some are just trying to take advantage of the media coverage that the sector is receiving. If more investors and traders knew how small the industry is, they might not fall for the hype so easily.

Deconstruct the marijuana industry and you’ll find several sectors: consumer, consulting, producer, pharma/research, industrials, and real estate.

marijuana sector

Source of Image: Bloomberg, 2017

Before you invest or trade in a marijuana stock, figure out what sector it’s in, some offer greater potential than others.

Bio-pharma marijuana stocks are focused on the research, development, medical and therapeutic treatment. For example, Insys Therapeutics (NASDAQ: INSYS) is working on bringing medical marijuana treatments to the market.

INSYS

Source: insys

You see, marijuana is being tested to cure the following diseases/conditions: arthritis, pain, muscle spasms, nausea, migraines, seizures, epilepsy, alzheimer’s, cancer, HIV, and much more.

There are over 2.6M medical marijuana users, according to 2016 estimates from ProCon.org. Those numbers should rise as more states legalize.

In addition, marijuana does not have harsh side effects like some prescription drugs. For example, many Americans suffer from opioid addiction after being prescribed painkillers.

Medical marijuana has the potential to influence millions of people across the globe, and the reason why bio-pharma is the largest sector in the industry.

Now, the second largest group of marijuana stocks are producers. These are companies that typically cultivate, grow, produce, and supply marijuana. The largest player in this space is Canopy Growth Corporation (OTCMKTS: TWMJF), a licensed producer of medical cannabis in Canada. The company has the largest marijuana-producing greenhouse in the world.

canopy growth

Source: Canopy Growth

If marijuana demand is expected to rise, the producing sector should also thrive.

Other promising sectors include consulting and industrial. However, going down the line, sectors like real estate, technology, and consumer, are still relatively small and lack leaders.

Do Your Homework

That said, always conduct due diligence. After all, who can forget Medbox–a marijuana vending machine company, accused of falsely stating up to 90% of its Q1 2014 revenue.

sec

Source: Fortune

An easy way to find out about the status of a company is by viewing its SEC filings.

sec gov

Source: Sec.gov

For example, in its 10-K filing, Massroots, Inc. (OTCMKTS: MSRTT) released this note on its financial statements on 3/31/17:

As of December 31, 2016, the Company had cash of $374,490 and working capital deficit (current liabilities in excess of current assets) of $1,332,902. During the year ended December 31, 2016, the Company used net cash in operating activities of $6,182,816. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management believes that the Company does not have sufficient funds to meet its funding requirements.

 In 2016, the Company sold shares of common stock and warrants for net proceeds of approximately $5,000,000.  In addition, the Company received approximately $1,158,494 from the exercise of common stock warrants and options and $1,420,000 from the issuance of convertible notes. It is anticipated that the proceeds from the sale of its common stock and warrants and from the warrant exercise will not provide the Company with cash sufficient to fund operations in 2017.

Source: BamSec

Of course, “legit” marijuana companies file documents with the SEC, and that information is available for free to the public, a must read for those serious about investing in the space.

So why is there hype?

  1. Strong media coverage.

marijuana stocks hype

Source: Google

A google news search will yield you over 10M results.

  1. No Real Leader.

You see, the beverage industry is pretty big. If a company announced that it would be entering the diet soda sector— no one would really care. After all, that is a market that is dominated by the likes of PepsiCo and Coca-Cola.

Bottom Line

There is still a major dispute between federal and state laws. It’s too sticky of an issue for some large cap companies to deal with. That said, with marijuana being illegal on the federal level, it makes it difficult for some companies to list on exchanges like Nasdaq and NYSE.

Naturally, these factors can lead to marijuana stocks being hyped up. However, there are real opportunities in the industry.  When researching cannabis stocks take note of which sector its in, and to read the company’s SEC filings.

1 COMMENT

  1. Thank you for your intelligent advice on researching a Cannabis Stock. Now I can invest in some that I’ve been researching. LKB.. 8/13/17.

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