3 High-Risk, High-Reward Marijuana Stocks

Sean Williams, The Motley Fool

In recent years, marijuana stocks have been what dreams are made of for investors. Though they've come with no shortage of risks and concerns, many of the largest players by market cap have soared beyond 1,000% over the trailing two-year period.

Why such bullishness? It mainly ties into the rapidly growing sales and consistently improving sentiment surrounding cannabis. Sales in North America are expected to grow by an average of 28% through 2021, according to recent data from ArcView, in partnership with BDS Analytics. Meanwhile, major cannabis poll after major cannabis poll in the U.S. continues to show that a majority of respondents (often between 59% and 64%) favors the idea of legalizing marijuana nationally. Support for medical marijuana is even stronger, usually exceeding 90%. These figures are more than enough to convince aggressive investors that the legal weed industry is going places.

A cannabis plant in sunlight.

Image source: Getty Images.

High-risk, high-reward pot stocks for aggressive investors to consider

But, as noted, the industry isn't without its concerns. Namely, it's dealing with a drug that's still illegal on a recreational-use basis in all but one country in the world; albeit Canada looks to be on the verge of legalizing adult-use weed by this summer. It's also an industry with absolutely no precedent, so no one is exactly sure what'll happen if Canada does legalize recreational pot. It's possible that oversupply could decimate the margins of growers, or we could see demand sail well past expectations. We simply don't know, and won't know, for many more months to come. That's what makes marijuana stocks a risky, but potentially rewarding, bet.

However, there are a handful of pot stocks that stand out as being among the highest-risk, highest-reward of the group. For those of you with an iron stomach for volatility, and the understanding that much of your investment could be wiped out if the cards don't fall the right way, the following three marijuana stocks are the perfect examples of high-risk, high-reward investments.

Emerald Health Therapeutics

Until recently, Emerald Health Therapeutics (NASDAQOTH: EMHTF) was a relatively unknown name in a sea of licensed cannabis growers. However, that isn't stopping it from expanding its growing capacity at a breakneck pace and attempting to rival some of the biggest pot growers in the Canadian industry.

Emerald Health's operations essentially breaks down into two projects. First, it formed a strategic partnership with Village Farms International (NASDAQOTH: VFFIF) to retrofit an existing facility that had been used by Village Farms to grow tomatoes for cannabis production. Retrofitting an existing facility rather than constructing a brand-new greenhouse is a cost- and time-saving measure. The 1.1-million-square-foot facility, which was recently granted a cultivation license by Health Canada, is expected to conservatively produce 75,000 kilograms of cannabis a year. Not to mention, the duo of Emerald Health and Village Farms has the option to lease another 3.7 million square feet of land for capacity expansion in the region.

Cannabis growing in an indoor facility.

Image source: Getty Images.

Additionally, Emerald Health is building out a 32-acre site that'll house its own headquarters and span 1 million square feet of growing space. A little over 500,000 square feet should be available for production by the end of this year. 

Even if Emerald Health chooses to wait on expanding beyond the 1.1 million- and 1 million-square-foot projects, it likely has the conservative capacity to generate 150,000 kilograms to 175,000 kilograms of cannabis a year. That would place it as perhaps the fourth- or fifth-largest producer in Canada. Assuming oversupply concerns are overstated, Emerald Health could be a surprisingly profitable company. But, if oversupply does rear its head, even with growing costs of below $0.78 per gram (CA$1), the company could struggle. 

Cannabis Wheaton Income Corp.

Another make-or-break marijuana stock is Cannabis Wheaton Income Corp. (NASDAQOTH: CBWTF), the world's first publicly traded marijuana royalty company. Taking its inspiration from the Canadian-based Wheaton Precious Metals, which operates as a precious-metal royalty company, Cannabis Wheaton isn't directly involved in the day-to-day production of marijuana. Instead, it's the financier in the middle that reaps huge margins.

Imagine this: There are more than seven-dozen licensed cultivators in Canada, and most have little or no access to basic lines of credit or loans from a bank. Yet, they need capital in order to expand their capacity with the expectation that Canada will legalize recreational pot by this summer. Cannabis Wheaton steps in and provides the capital for growers to expand their production or product line. In return, Cannabis Wheaton is entitled to a percentage of the annual production, which it then purchases at a well-below market rate. Lastly, the company then sells the delivered cannabis at market rates, thusly pocketing the difference as profit. It's estimated that the internal rate of return on its more than a dozen deals should be at least 60%.

A white bottle filled with dried cannabis that's been tipped onto a small pile of cash.

Image source: Getty Images.

According to company estimates, it should be delivered (and therefore turn around and sell) approximately 230,000 kilograms of dried cannabis in 2019. Though it's not a direct producer, it would make the company a top-five player based on those sale figures. Assuming oversupply doesn't wreak havoc on margins, its relatively fixed costs of around $2 per gram should allow it to sport some of the highest margins in the industry. 

Of course, if there is a marijuana glut, Cannabis Wheaton would feel the sting more than any other pot stock. Since its margins are entirely based on the current or average per-gram price for marijuana, and its costs are essentially fixed because of its licensed long-term deals, a substantially lower price on cannabis would make life very difficult for the company and its shareholders.

Cara Therapeutics

A third and somewhat loosely associated "marijuana stock" that could provide big rewards or major headaches for investors is Cara Therapeutics (NASDAQ: CARA). This "loose association" is tied to the fact that Cara's primary experimental drug, Korsuva (previously CR845), is a kappa opioid receptor agonist and has nothing to do with cannabis. It also has CR701, a CB receptor agonist, which has been examined as a treatment for pain in preclinical studies. It's this latter therapeutic that lumps Cara loosely in with "marijuana stocks."

The immediate promise and peril for Cara lies with Korsuva as a treatment for pain and/or pruritus, which is a fancy medical term for itching. In various clinical studies involving patients with chronic kidney disease-associated pruritus, Korsuva has performed quite well. Unfortunately, pruritus is a relatively small sales indication compared to treating pain. Yet, it's these pain indications that have sometimes shined, and at other times led to disappointment.

Two biotech lab researchers examining samples and making notes.

Image source: Getty Images.

In a midstage study in 2017, Cara announced that Korsuva's 1 mg and 2.5 mg doses for patients with osteoarthritis of the hip or knee failed to reach statistical significance, while the 5 mg dose, the highest dose given, only reached statistical significant for osteoarthritis of the hip. This study was expected to yield strong results, but wound up producing mostly negative news.

On the bright side, a phase 3 study involving Korsuva in postoperative pain was recommended by an independent data monitoring committee to continue, which is a possible sign of efficacy being met. With Cara open to the idea of pursuing an osteoarthritis of the hip indication for Korsuva, as well as possibly being able to supplement its revenue with pruritus indications, and through CR701, Cara has a real opportunity to surprise Wall Street within the next few years. 

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Sean Williams owns shares of Wheaton Precious Metals. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.