54 Stocks Deep in the Weeds

Cannabis continues to light up Main Street in both the U.S. and Canada. Twenty-eight U.S. states and the District of Columbia now have approved medical marijuana programs; eight—Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington, plus the District of Columbia—have legalized marijuana for recreational use. Medical marijuana is already allowed throughout Canada, and in mid-April the Canadian government unveiled its framework for fully legalizing recreational use by July 1, 2018.

Meanwhile, the market capitalization of the stocks in the Bloomberg Intelligence Global Cannabis Competitive Peers Index—an equally weighted index of 54 stocks with significant exposure to cannabis-related operations—tripled since the start of 2015.

Adding to the buzz has been a wave of M&A activity in the sector: Pharmaceuticals are on track to reach a record number of M&A deals, driven largely by companies eager for more supply or products. This year, for example, Canopy Growth Corp., itself a producer of medical marijuana, completed a $267 million acquisition of Mettrum Health Corp., an agri-pharmaceutical company focused on the research, development, production and distribution of medical cannabis products.

With legal U.S. marijuana sales expected to reach $5.7 billion this year and Canadian retail sales forecast at C$6 billion ($4.5 billion) by 2021, investors are swarming. On April 5, the world’s first pot ETF was launched, making it easier to invest in the industry. The Canadian-domiciled Horizons Medical Marijuana Life Sciences ETF holds small U.S. and Canadian companies with an average market cap of $500 million. Five days after its launch, the ETF was up 16 percent.

Yet the cannabis industry carries risks. Many investors may balk at buying a fund or stock tied to a drug that is illegal under federal law in the U.S., despite the allure of stellar returns. More of a downer, however, is uncertainty surrounding regulation and enforcement in both the U.S. and Canada.

In early March, Attorney General Jeff Sessions suggested that the U.S. may tighten federal enforcement of marijuana laws, even in states where medical and/or recreational use is legal. In Canada, many details are up in the air, including price, taxation, packaging and retail sales rules. Canadian marijuana companies still don’t know what they can sell, where they can sell and how much they can charge.

The stocks reflect these concerns. The Horizons Medical Marijuana ETF fell off after its strong performance and was up less than 6 percent from launch to April 19. The BI Global Cannabis Competitive Peers was up 55 percent as of February 21. It tumbled soon after, and was up 23 percent for the year.

Still, the market cap of the BI cannabis index was $58 billion on April 18, up from $30.1 billion a year ago. And many stocks in the index have been standouts. Among the best: a Canadian, a U.S. and an Australian stock. InMed Pharmaceuticals, based in Vancouver, was up 257 percent as of April 19; it specializes in the research and development of cannabinoid-based therapies. Cannabics Pharmaceuticals, a U.S. company whose R&D is based in Israel, works on personalized anti-cancer and palliative treatments. It was up 220 percent. And MMJ PhytoTech, the first Australian-based company to receive a Canadian medicinal cannabis cultivation license, has returned 173 percent.