Though it probably goes without saying, it should be noted that marijuana stocks have been on fire over the trailing year. All but one of the 13 marijuana stocks with market caps above $200 million are up on a trailing-12-month basis, and two-thirds of those that are up have at least doubled in value.
Why such love for the green rush? Look no further than rapidly changing public perceptions of the drug, as well as legal sales figures.
According to both the 2016 Gallup poll and the more recent CBS News poll, an all-time record percentage of respondents — 60% and 61%, respectively — want to see marijuana legalized across the country. If pollsters focus purely on medical cannabis, favorability toward legalization shoots to somewhere in the neighborhood of 90%, depending on the source of the survey. With such growing acceptance of cannabis, marijuana stock investors fully anticipate that recreational and medical sales will continue to thrive.
From a sales perspective, a recent Marijuana Business Daily report titled “Marijuana Business Factbook 2017” found that U.S. sales are expected to grow approximately 30% this year to a range of $5.1 billion to $6.1 billion, with legal recreational and medical sales combined reaching a projected $17 billion by 2021. Between 2016 and 2021 we’re looking at 300% sales growth. Investors would struggle to find more consistent growth elsewhere, which is why they’ve flocked to pot stocks.
However, over the two-week period between July 7 and July 21, three marijuana stocks have really stood out from the pack for their impressive percentage or market-cap gains. Let’s have a closer look at which companies have truly been “growing like a weed” recently.
In spite of no major news events, the mammoth of all marijuana stocks, GW Pharmaceuticals (NASDAQ:GWPH), has seen its share price move higher by nearly 13% over a two-week period. On a valuation basis, we’re talking about $325 million being added in just 10 days’ time.
What the heck is going on here? More than likely, this move has to do with the anticipation of GW Pharmaceuticals’ filing for a new drug application (NDA) with the Food and Drug Administration (FDA) for Epidiolex very soon. Epidiolex is an oral cannabinoid-based medicine that, in phase 3 clinical trials, generated a statistically significant reduction in seizure frequency for patients with two rare types of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. GW Pharmaceuticals’ management team has suggested that investors expect an NDA filing by mid-2017, which would signal it’s due any time now.
If Epidiolex gets a green light from the FDA, and it’s fortunate enough to expand its label beyond just the two aforementioned rarer types of epilepsy, it could make a run at perhaps $1 billion in peak annual sales. This is why investors are so bullish regarding GW Pharmaceuticals. Still, we’ll need to see if the FDA grants the company a priority review, which would shorten the NDA review period by four months to a six-month process and get Epidiolex to market quickly. Further, an approval is no guarantee for a cannabinoid-based product.
Likewise, with the company’s only other approved product (outside the U.S.), Sativex, failing to garner much in the way of sales, there are concerns about GW Pharmaceuticals’ effectiveness in marketing and pricing Epidiolex, if approved. For the time being, the company’s stock appears priced for perfection.
Unlike GW Pharmaceuticals, where hope seems to reign supreme, three press releases over the past couple of weeks have been wholly responsible for Aurora Cannabis’ (NASDAQOTH:ACBFF) charge higher. In just two weeks, the Canadian medical-cannabis producer and retailer has seen its share price rocket 29% higher.
One catalyst involves the promotion of Aurora Cannabis from Toronto’s TSX Venture Exchange to the Toronto Stock Exchange. The move is a result of Aurora Cannabis’ increase in market cap over the past year, and it may help legitimize the company by opening the door for institutional investors now that it’s listed on a more reputable exchange.
Second, a late June business update may still be providing some lift for the company’s share price. As of June 29, the company announced that it had more than 16,000 active registered patients and that it had achieved a record $2.4 million in gross revenue in May. In particular, the launch of new ingestible cannabis oils propelled its sales growth. Cannabis oils usually have higher price points and better margins than dried cannabis, so this should be great news for Aurora Cannabis’ margins.
Investors are probably also excited that the company’s wholly owned subsidiary, Pedanios GmbH, passed the first stage of the tender application process to become a licensed medical-cannabis producer in Germany. Germany recently legalized medical cannabis, but it has very few approved domestic growers. Pedanios has the opportunity to be a market-share leader in Germany’s nascent medical-pot industry.
Investors would be wise to wait for Aurora to generate consistent profits before they consider dipping their toes in the water, but the company is clearly heading in the right direction.
Last, but certainly not least, Aphria (NASDAQOTH:APHQF), which is also a Canadian-based medical-cannabis producer and retailer, has seen its market value surge by 24% in two weeks. The reason? Look no further than the company’s fiscal fourth-quarter results.
The headline number for Aphria’s fourth quarter was a bit of a disappointment: It wound up losing about $2 million for the quarter, breaking a streak of five consecutive quarterly profits. However, the company had a pretty valid reason for the loss. According to the press release, Aphria has been spending heavily on its capacity expansion with the expectation that recreational marijuana may soon be legal in Canada.
Beyond the company’s quarterly loss, investors were impressed with other aspects of its growth. For instance, EBITDA grew by 962% on a year-over-year basis, and its full-year gross margin improved by 670 basis points to 77.6%. Total sales also soared by 142% for fiscal 2017.
Beyond just sales and EBITDA, we also saw Aphria up its capacity forecast once again, implying that its operations are becoming more efficient. In addition, its all-in cash costs fell by 25% to just $1.31 a gram. All signs point to a further rise in Aphria’s margins in the quarters to come.
If there’s one complaint this Fool has, it’s the company’s nosebleed valuation. After its recent run higher, Aphria’s trailing 12-month P/E ratio is about 185. Even with its astronomical growth rate, it doesn’t make a lot of sense chasing Aphria’s stock here unless Canada legalizes recreational marijuana. Until we know what Canada’s parliament plans to do in that regard, or Aphria’s fundamentals begin to look more attractive, I’d simply keep this stock on your radar.