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Summary

  • The marijuana industry is drawing investor attention through legalization in Colorado and Washington State.
  • There are a number of first movers, any one of which could prove an industry leader as the space matures.
  • There is still considerable risk in the industry, but plenty of potential upside.

The recent legalization of marijuana for recreational use in both Washington and Colorado, alongside its growing popularity as a pain management mechanism, has generated a huge amount of investor interest in what is essentially a brand new industry. Some have suggested the industry will be the biggest growth opportunity of the next ten years, while others have suggested the so-called "green rush" is potentially catastrophic, and could prove to be the next dot com crash. All that can be said for sure is that the market is starting to pay attention to what has historically been a fringe industry shrouded by illegality. Many stocks are currently trading over the counter and most have tiny, or conversely, unjustifiably large, market capitalizations, making investment in the space fraught with risk. Are there any viable investment opportunities in the medicinal and recreational marijuana space?

Cara Therapeutics Inc. (CARA)

The first company of note is Cara Therapeutics, Inc. At its core, the company is an emerging biotechnology company focused on developing novel therapeutics to treat human diseases associated with pain and inflammation. The company's most advanced compound, CR845, has nothing to do with marijuana and is what is called a Kappa antagonist. A Kappa antagonist is a protein that, in humans, is encoded by the OPRK1 gene and is responsible for the binding of opium, and opium-like, compound in the brain. Through this binding the receptors control, among other things, the perception of pain. CR845 is a compound that interacts with these receptors and, Cara Therapeutics believes, helps to manage chronic pain.

In its most recent related announcement, Cara Therapeutics announced top line results from a phase II trial of the compound. The trial met its primary endpoint, a significant reduction in pain intensity, over the initial 24 hour time period compared to placebo. In addition, the trial also met the secondary endpoint of a statistical reduction in pain intensity over the entire 48-hour dosing period. The company aims to complete phase III trials before the end of 2014.

Shifting focus to the marijuana aspect of the company's operations, and its reason for inclusion in this list, Cara Therapeutics is currently developing a CB agonist called CR701. Just as the human body has a nervous system and a hormonal system, it also has a cannabinoid system. As a pain management tool, the cannabinoid system produces what are called endocannabinoids, which it targets at the areas of the body experiencing pain. The endocannabinoids link to cannabinoid receptors in that area and activate neurotransmitters, such as dopamine, to counter pain. Cara Therapeutics has developed CR701, which modulates peripheral cannabinoid receptors such as those found in immune cells, which are involved in pain and inflammatory responses to trauma and disease.

The thing that distinguishes this company from the others on this list is that it does not actually use plant marijuana in its treatment. Its compounds are synthetic. Despite this, its timely IPO looks to have led to it being included in the current hype surrounding the marijuana industry. An investment in Cara Therapeutics is essentially a biotechnology play in the pain management industry, with a small side exposure to the potential growth in the marijuana space.

As a result of this, the company comes with all the standard risks of a development stage biotechnology investment. The most important being that Cara Therapeutics does not currently have any FDA approved treatments, and in turn, does not yet generate any revenues. Most treatments fail the approval process, meaning investors may never see a return on their capital.

An additional risk lies in transparency. The company only recently listed on the NASDAQ, and does not plan to release its financial reports until March 27. The road to FDA approval is costly and the reports may highlight a funding shortfall. Such a scenario would suggest future share issue, which could dilute the holding of an early investor.

CannaVEST Corp. (OTCQB:CANV)

The second company on the list is CannaVEST Corp. CannaVEST Corp has a large portfolio of hemp products that it markets and sells under the guise of a variety different brands. Perhaps the most well-known is U.S. Hemp Oil, which is involved in the procurement, processing, marketing and distribution of bulk wholesale hemp seed, hemp oil, protein, food and hemp body care products around the U.S. As with Cara Therapeutics, the majority of CannaVest's core business operations do not have any relation to the medical or recreational marijuana company; in fact, the company is actively lobbying for industrial hemp plants to be legally separate from marijuana plants.

Its inclusion on this list however, revolves around a March 1, 2013 announcement that the company had acquired the assets PhytoSPHERE Systems, LLC, from marijuana products producer Medical Marijuana Inc (OTCPK:MJNA). One of the terms of the acquisition, is a supply agreement (currently under negotiation) that will see CannaVEST supply Medical Marijuana Inc. with its requirements for raw hemp oil product at favorable pricing, in exchange for the Company's agreement to purchase its requirements from CannaVEST.

This agreement offers investors exposure to the potential growth of the medical and recreational marijuana industries, and to the more stable growth of the hemp oil industry, which the recent legalizations have revitalized. Prior to these legalizations it was illegal to grow hemp plant in the U.S. CannaVEST is in the process of developing agreements with hemp farmers in Colorado and Washington State, which will see these farmers transport hemp plant to a processing plant that will convert hemp plant into hemp oil in their respective states and supply CannaVEST with the legal, processed product.

The main risk surrounding CannaVEST at present is its valuation. Regardless of their actual relationship with marijuana, the majority of companies associated with the industry have drawn extensive investor attention throughout start of 2014. The company's stock rose from $16.00 per share on December 16, 2013, to highs of $165.00 per share on February 24, 2014. The last month has corrected the rise somewhat, but CannaVEST stock is still trading around the $60.00 per share mark, a more than 300% gain on its December price. The legalization of hemp plant growth in two states has had a direct impact on the company's potential, but the impact of its exposure to medical marijuana through the recent acquisition remains unclear. At a current valuation, just below $700M, only a substantial pullback could justify exposure to the company's potential for long-term growth.

Chineseinvestors.com, Inc. (OTCQB:CIIX)

The final company on the list differs from the others in that it offers direct exposure to a marijuana grower. At the core of its operations, Chineseinvestors.com provides Chinese language real-time market commentary, analysis and educational related services, mainly through the web. On February 12, however, the company announced it had entered into a new business venture with Medicine Man of Denver, one of the first businesses in Colorado to be granted a recreational use license for growth and distribution of Marijuana. Chineseinvestors.com's role in the new venture will be focused on the development of licensing protocols alongside development of the company's harvest process.

According to an interview shown on NBC, which you can see here, the owners of Medicine Man are attempting to turn the current marijuana production process into an industrial operation. The company's goal is to create a national chain of marijuana growers/retailers if, and when, other states follow the lead of Colorado and Washington. By establishing a scalable supply and distribution platform, Medicine Man can ensure its first mover advantage in other states. Analysts are promoting the company as having the potential to become the "Costco of marijuana."

Chineseinvestors.com offers investors direct exposure to the marijuana retail industry, through its partnership with an established, reputable retailer, with the potential for nationwide expansion and exponential growth as other states pass recreational marijuana laws.

The risks associated with Chineseinvestors.com are a combination of those mentioned in the other sections, plus a couple unique to the company. Its stock has risen in line with that of its peers, inflating 130% since the beginning of the year, suggesting a short-term correction could be due. In addition, the company offers exposure to the retail side of the industry, which will put it in competition with the numerous independent retail outlets also licensed in Colorado. Finally, the company has just 5.97M shares outstanding with a float of 5.32M. Tight share supply could serve up extensive volatility in the value of the company's stock, and in turn, the holdings of any early investors.

One Final Note On Risk

It is extremely important that investors recognize the risks associated with exposing themselves to this fledgling industry at this stage of its development. While a number of the stocks mentioned have offered up supernormal returns during the past six months, the current valuations of these companies do not accurately reflect their underling operations. As with the rise of internet stocks over the past decade, many will fail, while only a few will become market leaders. The point of this piece is to highlight some of the first-movers in the industry, not to suggest those companies that might, or might not fall into the latter category.

Conclusion

The marijuana industry is an industry with a huge amount of potential, but its fledging status currently makes investment in this space an unpredictable endeavor. An investor looking to capitalize on the space's potential, without exposing their capital to the very real risk of an asset bubble, might consider a portfolio of marijuana stocks that range in exposure type and growth potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: 3 Very Different Exposures To The Marijuana Industry