The legal sale of marijuana in Washington State is going to bring a second wave of marijuana stock hype. The issue is that many of these companies are trading OTC where there are less filing requirements and accurate information can be difficult to find. Whenever there is a hyped-up product, there will magically be a surge in companies that have names similar to the product. They seem to merely be setup for pump and dumps. The stocks might get halted at some point in time by the SEC, but it is the investor that gets hurt, not the promoters. The promoters have likely made their money already, and the investors are stuck with a worthless stock. I have seen it all too often at a previous position as a stock broker.
While many value investors shy away from the “hot” industry, it is still enticing. To keep from playing Russian roulette as to which stock will be halted, you can check with the gurus to see if they have done any of the legwork. I looked up information about all of marijuana stocks on GuruFocus and found that two of them are held by the gurus, GW Pharmaceuticals PLC (GWPH) and Nuvilex Inc (NVLX). That does not mean that all of the other stocks are worthless, although there are quite a few that likely are. In the world of hyped-up penny stocks, following the gurus is a great way to help avoid the scams. FINRA specifically addressed the issue with these stocks earlier this year with their investor alert, “Marijuana Stock Scams.”
GW Pharmaceuticals PLC (GWPH)
GW Pharma is held Louis Bacon founder of Moore Capital Management. He is known to use a global macro strategy to invest in the markets. He bought 34,200 shares of the stock in the first quarter of 2014. His shares represent only about 0.2 percent of the shares outstanding and are valued at about $3.06 million. Jim Simons (Trades, Portfolio) of Renaissance Technologies LLC previously held 5,100 shares and sold them in the first quarter of 2014. This is the only stock in the industry to be recommended by Jim Cramer of CNBC.
GW Pharma is the largest of the marijuana stocks with a market cap of $1.33 billion, and it trades on the NASDAQ and the London Stock Exchange. The company is headquartered in Salisbury, United Kingdom. The stock recently became public in the United States in May of 2013 and is up 895 percent since it started trading. The company develops plant-derived cannabinoid therapeutics. GW Pharma says that the cannabis plant is a unique source of over 70 cannabinoid molecules and only THC is known to cause psychoactive effects. Its leading drug is Sativex, an oral spray that has been approved in 25 countries (ex-U.S.) for MS Spasticity. It is in phase III trials for cancer pain in the EU and US.
The company is highly speculative since it is only generating about $47.5 million in revenue. It has been successfully able to handle its financial stability by having enough cash to operate for another six years in relation to its negative free cash flow. The company has $160 million in cash and had a negative cash flow of $26.62 million for the past twelve months. For the cannabis related stocks, GW Pharma seems to have the most promise, but that is already reflected in the price. The company is considered to be a biopharmaceutical company. I think there are plenty of other biopharma stocks out there for a better value.
Nuvilex Inc (NVLX)
Nuvilex is currently held by Ken Fisher of Fisher Asset Management. He is the son of the legendary investor Phillip A Fisher. The investment philosophy at Fisher Investments is based on the idea that supply and demand of securities is the sole determinate of their pricing. The way to add value is to identify information not widely known or to interpret widely known information differently and correctly from other market participants. He purchased 11,300 shares in the first quarter of 2013, the same quarter that the subsidiary Medical Marijuana Sciences, Inc was incorporated. His purchase was a very small one that amounted to about $500 at the time. Today it is valued at about $3000. Even though it was a small purchase, it helps bring some credibility to the company and helps separate it from the possible scams.
Nuvilex is a micro cap company of only $167.3 million and trades over-the-counter on the pink sheets. In July of 2013, Nuvilex acquired Bio Blue Bird AG (BBB) from SG Austria Private Limited. BBB holds the exclusive worldwide licensing rights to the use of living-cell encapsulation, called Cell –in-a-Box, for treating pancreatic cancer. It is a cancer treatment that can specifically target the tumor using prodrug-activating cells. The capsules have shown no appreciable degradation after more than two years in the body. The capsules are also made of cellulose and have not caused inflammatory responses. It is currently in a phase II trial. The company also wants to combine cannabinoids with Cell-in-a-Box to target pancreatic and brain cancer. The treatments use the non-psychoactive cannabinoids of THCA and CBDA.
The company is highly speculative and produces no revenue. There is no clear answer for when or if revenue will start rolling in. It is also going to need to raise some more cash within the next year if it is going to continue to operate. The last quarterly report showed cash balance of $870,000 and negative cash flow of $250,000 for the quarter. The company has been doing so successfully by selling more shares out into the market. Shares outstanding have been increasing at a rate of about 19.5 percent per year over the past five years.
Conclusion
Both of these stocks are still highly speculative since neither is producing any significant revenue, if any at all. With all of the hyped-up marijuana stocks out there, it is a good idea to see what the investing gurus are holding to help find some of the more legitimate companies. Let the gurus do the leg work and find a company that will likely have a higher probability for success.
