In the past few weeks we have seen some massive volatility in the most active cannabis stocks. At the same time we have seen broad market indexes like the NASDAQ and the S&P 500 hit new record highs, begging the question of whether the cannabis stocks are just following general momentum or moving on their own set of catalysts.
Stocks Still Way Down
This discussion cannot really begin until we acknowledge how far most cannabis stocks are down from their peak in March of last year. This measure from Bloomberg shows that a broad basket of cannabis-focused equities is still down over 50% from its peak, while the NASDAQ has gained almost 1,000 points in that span.
However, there are some cannabis-based stocks that have bucked this trend. Stocks like GW Pharmaceuticals PLC (NASDAQ: GWPH) and Insy Therapeutics (NASDAQ: INSY) are not only up big so far in 2015, they are within a hair of their all-time high stock prices. A third pharmaceutical company, Arena Pharmaceuticals (NASDAQ: ARNA) has also thrown its hat into cannabis-based therapy ring.
But investors need to understand how much of this performance is based on general market giddiness, and how much is because of broad speculation that access to legal cannabis production, testing and consumption is on an inexorable rise.
GW Pharma Forging Ahead
GW Pharma (NASDAQ: GWPH) has been continuing to deliver promising drug trial results for its Sativex and Epidiolex therapies, including a key Epidiolex trial that showed a greater than 50% reduction in seizures in Phase 3 testing—this is the last phase of human testing before the FDA can grant approval for a given medical indication.
Shares of GWPH rose 10% on this news alone, and are up over 65% in 2015. And while the iShares NASDAQ Biotechnology Index (NASDAQ: IBB) has also massively outperformed the broad market this year, the ETF is only up 13.5%. So GW Pharma has outperformed the hottest industry ETF in the market this year, and by a four-times margin. This is a strong sign that a component of its recent outperformance is due to the company’s position at the forefront of cannabis pharmaceutical science. But with this great run has also come an extreme amount of volatility; in the past three months, GWPH shares have made wilder intraday moves than all but 1% of NASDAQ stocks.
Investors should also note that GWPH just announced a secondary stock offering of up to 1.25 million shares; this will dilute current equity holders, but given the stock’s huge climb this year, it is a prudent capital-raising move by company management. It is a cheap access to cash that can be used to fund more studies and trials for its massive intellectual property portfolio.
INSY Becoming the Epitome of Volatile
Insy Therapeutics (NASDAQ: INSY) has been doing a great job of delivering results to the top and bottom line, reporting over 120% revenue growth in 2014 as well as more than doubling pre-tax income. The company’s Subsys drug continues to generate the lion’s share of revenues; however, there are still outstanding issues relating to Subsys prescriptions written and the doctors who wrote them.
But the Subsys investigation news has been out for many months now, and the short sellers who have sold nearly 50% of the outstanding shares short have been pained, as the stock is up over 30% in 2015 after hitting new all-time highs. This continues to be a battleground stock for bulls vs. bears, but the reasonable earnings valuation and some promising Phase III trials to begin later this year provide a floor around the stock that most cannabis companies simply do not have.
Arena Branching Out
Arena (NASDAQ: ARNA) currently has just one drug approved by the FDA, BELVIQ for obesity, and it faces major competition from several other big-pocketed players, but it has also received a patent for a compound called APD371. This compound is an agonist of the cannabinoid receptor 2 and it is being tested for its ability to treat chronic pain and fibrotic disease.
ARNA has a $1 billion market cap and has risen over 28% so far this year, but shares have been a perennial under-performer in the past decade; shares were over $10 in 2012 but under $4.50 today. And for being around so long, the company has not seemed to be able to deliver drugs to market with any consistency. However in this day and age, a good compound is all you need; they are frequently brokered and traded amongst pharma companies in the hopes of finding the largest possible market. If APD371 has blockbuster potential, someone will unlock it.
Broad Interest or Cannabis Interest?
The fact that all three of these stocks, which have handily beaten not just the broad market or the tech-heavy NASDAQ but also the high-flying IBB should tell you something. There is investor interest here that is coming just for the cannabis angles. This is neither inherently good or bad, but it is worth noting. If the arc of recent political machinations stays true to its current course, the rescheduling of cannabis could be the first chink in the prohibition armor. Until that happens, waiting and watching while respecting overall diversification tenets is the best prescription.
But in a world where cannabis is deemed by the federal government to have broad medical use, these three stocks will definitely have a leg up on the competition. And if you, like us, believe that there is tens of billions in end market potential for cannabis therapeutics, it is a leg up in a very long and profitable race.