Whether you think marijuana should be legal or not, it looks like the trend is pushing toward legalization. But emotions still run high when it comes to marijuana and the companies that support the sale of the drug. The niche sector is fascinating to watch, but I have two big reasons why I won’t touch companies like Aphria (NASDAQOTH:APHQF) and Canopy Growth Corporation (NASDAQOTH:TWMJF).
For the sin of it
The first reason I will never invest in marijuana stocks is pretty simple: I don’t like to invest in sin stocks. You can easily retort that marijuana is a medicinal drug, and I wouldn’t argue with that. However, if that’s why you’re investing in the space then why not look at companies like GW Pharmaceuticals (NASDAQ:GWPH), Corbus Pharmaceuticals Holdings (NASDAQ:CRBP), and Insys Therapeutics (NASDAQ:INSY). These companies all have promising marijuana-related drugs in development.
GW Pharmaceuticals is working on cannabidiol drug Epidiolex to treat seizures. Corbus Pharmaceuticals’ Resunab is being used to treat systemic sclerosis, a chronic autoimmune rheumatic disease. And Insys’ Syndros is being used to deal with weight loss in patients with AIDS and the nausea associated with chemotherapy. The Motley Fool’s Keith Speights highlighted these as three of the top marijuana stocks for 2017, and they are in a sense — but really, they’re pharmaceutical stocks.
Those stocks seem to me to be better ways to invest in marijuana if you’re looking at it as a medical issue. If you aren’t, then the drug is no different than alcohol or tobacco. And since I try to avoid those, I can’t justify owning a company looking to benefit from the slow march toward legal marijuana.
The big dogs could jump in
And that brings up my second big issue: Aphria and Canopy Growth Corporation are basically both Canadian growers that are opportunistically growing their businesses in their home market, where only medical marijuana is currently permitted but legalization of recreational use of the drug could be on the way. Aphria, for example, had a more than year-long string of quarterly profits that was just broken by capital investments to grow its still young business. It lost $0.02 a share in the most recent quarter, but it was still the seventh quarter of positive EBITDA growth.
APHQF Revenue (Quarterly) data by YCharts
Canopy Growth, meanwhile, hasn’t put up results quite as consistent on the bottom line. However, its top line has expanded steadily, with the most recent quarter showing sequential quarter growth of a massive 50%. Revenues were nearly 200% higher than the year-ago period. And Canopy has big expansion plans in the works, recently announcing a collection of initiatives to increase production, including the expansion of existing facilities, licensing successes to open new facilities, and acquisitions.
But these two companies combined have annual revenues of roughly $60 million dollars. They are definitely real businesses, but when it comes to sin stocks they are even smaller than rounding errors. For example, tobacco giant Altria‘s top line came in at $19 billion last year. If the marijuana industry really does take off, how long do you think it will be before giants like Altria try to take a piece of it? They have the money, scale, legal and regulatory expertise, and loyal customers. Just look at their efforts to cash in on the vaping craze.
I’m sure that some marijuana stocks will make it, but which ones survive, which get bought out by bigger players, and which get squeezed out by better-run companies? Because the industry is so young and small today, I see stepping into marijuana stocks as little more than rolling the dice on these issues. That’s not something I like to do.
Not worth my effort
When I boil it all down, watching the social, legal, and business changes taking place in the marijuana industry is fascinating stuff. But investing in this sector isn’t in the cards for me. First there’s the sin stock thing, which may not be an issue for everyone. But then there’s the business issue of figuring out which companies are most likely to dominate the space over the long term. I don’t think it’s going to be the tiny companies now building up the fast-changing market. And even if some of today’s leaders do survive, it’s way too early to tell which companies will be the long-term winners when even larger sin stocks like tobacco companies try to get a piece of the marijuana action.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.