United Cannabis Corp. (fka CNABQ)

[Otcinvesting]

Investors seek high returns in marijuana stocks

Investors seek high returns in marijuana stocks
Tom Anderson | @bytomanderson
Saturday, 15 Oct 2016 | 9:00 AM ET

http://marijuanaindex.com/

Pot firms on extended bull run
http://marijuanaindex.com/industry-news/?newsId=8505605188155489&headline=Pot-firms-on-extended-bull-run


No matter who wins on Election Day, cannabis will have a big day at the ballot box.

Five states — Arizona, California, Maine, Massachusetts and Nevada — have initiatives to legalize marijuana for adult recreational use. Four states — Arkansas, Florida, Montana and North Dakota — have proposed legalizing marijuana for medical purposes. All of the recreational use initiatives are currently ahead in the polls.

They will not be alone. Twenty-five states and the District of Columbia have legalized the possession and distribution of marijuana for medical purposes, and four states — Washington, Oregon, Alaska and Colorado — have legalized adult recreational use. (See map below.)


Legal marijuana sales are projected to reach $20.6 billion by 2020 from $7.4 billion now, with a compound annual growth rate of 29 percent, according to New Frontier Data, a Washington, D.C., cannabis research firm.

If November's ballot initiatives pass in Arizona, California, Florida, Maine, Massachusetts, Montana and Nevada, these states alone will account for $2.7 billion in additional sales in 2018, growing to nearly $8 billion by 2020, New Frontier estimates.

British biotech company GW Pharmaceuticals, the largest stock on the Marijuana Index with a market capitalization of $2.8 billion, has a promising cannabis-based drug pipeline, according to Goldman Sachs, which gave the company a buy rating this month.

Mad Money 2 GW Pharmaceuticals CEO: Epilepsy trial is a 'huge step' in FDA approval journey
Monday, 26 Sep 2016 | 6:15 PM ET | 07:41
The Marijuana Index, which began in January 2015, is only a small slice of publicly traded cannabis stocks. To be included, stocks need to have a market capitalization of at least $10 million, a daily trading volume of $20,000 and a share price above 10 cents.

Only 23 stocks have made the cut, out of nearly 200 similar stocks that trade on exchanges and over-the-counter markets in the U.S. and Canada. The average stock on the index has a market capitalization of $263.9 million and a share price under $4.

Returns for cannabis stocks have been volatile. The Marijuana Index is up more than 180 percent this year, but plunged 57.2 percent in 2015. (See chart below.)

Marijuana stock performance is "mostly correlated," which means individual company stocks often rise and fall in lockstep with the broader industry, Nicholls said.
Even with the strong correlation, investors are better off buying a basket of marijuana stocks rather than taking a flier on one company, Nicholls said. "It's really hard to say right now how much these companies will be worth," he said, because the cannabis market is very competitive, faces a lot of regulatory challenges and could dramatically change if larger companies were to enter it.

Usually, if investors want exposure to a risky industry without picking stocks, they would buy an exchange-traded fund, which tracks stocks in a particular sector. Unfortunately for cannabis investors, there is no marijuana ETF.

That doesn't mean pot investors have to choose among GW Pharmaceuticals, penny stocks or nothing at all.

Some analysts recommend investors hold stocks of companies that supply the booming marijuana industry. For example, lawn-care products maker Scotts Miracle-Gro has been acquiring hydroponics businesses over the past year.

"The hydroponics market taps into marijuana demand and the company now has a growth option that we think an investor is able to capture for about the price of the traditional business," wrote JPMorgan analyst Jeffrey Zekauskas about Scotts Miracle-Gro in an Aug. 4 note to clients. The stock is up 32.7 percent so far this year.

Whatever route you take to investing in cannabis stocks, prepare for a long, strange trip.