Biotech Stocks You May Have Overlooked: How to Invest in Marijuana Stocks

04/02/2015 9:00 am EST

Focus: HEALTHCARE

Michael Berger

President & Founder, Technical420.com

Michael Berger is the president and founder of Technical420.com, a sell-side research firm focused specifically on the cannabis sector. He was working for the equity research department at Raymond James Financial Inc., when he recognized a need for a service that provides up-to-date research and analysis on companies that operate in the cannabis industry.

Marijuana support in the United States has grown significantly over the last two years and we are reaching a tipping point. For the first time ever, a few well-respected surveys (General Social Survey and the Gallup survey) show that a majority of Americans favor the legalization of cannabis. Also, approximately 80% of voters want to see US policy recognize the drug as what it really is: a medicine.

Currently, 23 states and the District of Columbia have broad medical marijuana laws. Another 12 states have legalized cannabis strains that contain low-THC and high CBD. These states allow patients who suffer from certain debilitating conditions access to these strains.

These recent developments have led to a surge in the number of publicly traded cannabis companies; the market has seen more than 100 public companies enter the industry in the past year. This has enabled the industry to expand in such a way that investors can invest in a company that does not cultivate or distribute marijuana. This rapid growth has created a number of opportunities for companies, especially those in the biotech sector.

The Biotech Sector Is the Greatest Beneficiary of Cannabis Reform

The biotech sector has been and will continue to be one greatest beneficiaries of the growth in the cannabis industry. The sector is comprised of the most credible cannabis companies; some of which trade on the NASDAQ.

These companies saw tremendous growth during 2014; however, that was just the beginning. These companies focus on developing treatments to improve the daily lives of millions of people who suffer from a variety ailments.

The biotech sector has a number of catalysts that will enable these companies to experience incremental revenue growth for decades to come.

Recent developments out of Washington D.C. show that change is on the way and it is coming sooner than later.

Bipartisan bills have been introduced in both the Senate and House of Representatives which include a number of key provisions such as:

  • Rescheduling marijuana to a schedule II substance from its current schedule I status

  • Eliminate barriers to marijuana research

  • Remove low-THC strains of marijuana from the controlled substances list

  • Remove low-THC strains of marijuana from the controlled substances list

  • Give veterans easier access to medical marijuana

  • Open up banking for marijuana businesses

How to Invest in Marijuana Stocks

Currently, there are three biotech companies trading on the NASDAQ exchange which are focused on developing medicines derived from cannabis.

There are also a number of biotech companies trading on the over-the-counter (OTC) exchange. These companies are in their developmental stage and are thus naturally speculative in nature. However, with big risk comes big reward. Investors must be selective and look extensively into each company prior to investing. We recommend carefully considering factors such as:

  • Is the company generating revenue?

  • What exchange does the company trade on?

  • How many shares are outstanding and what is the company's dilution potential?

  • Who makes up the company's executive board and what is their track record?

  • Is the company taking steps to capitalize on growth opportunities?

Isn't the Over-the-Counter (OTC) Exchange Filled with Pump and Dumps and Scams?

The OTC exchange gets a bad rap because a majority of the companies that trade on it are pump and dumps. However, investors can find diamonds in the rough if they have the right information. Our goal is to help investors focus on legitimate companies that are led by a management team with a proven track record.

One of the biotech companies on the OTC exchange entered into a partnership with the University of Mississippi. Since 1968, the university has been the sole provider of marijuana for medical research through a partnership with the National Institutes of Health. In March, the University of Mississippi was awarded a $68.8 million contract to continue growing and researching the medical benefits of marijuana.

The company licensed a proprietary pro-drug formulation and several smoke-free delivery methods. These delivery methods are designed to fix some of the problems associated with medical marijuana products such as edibles, oral sprays, and pills, which go through the liver to be metabolized.

Outlook

Due to cannabis being listed as a Schedule I substance, pharmaceutical companies and researchers cannot study the benefits associated with cannabis on a large scale. The rescheduling of cannabis is the greatest potential catalyst for this industry, and after it is rescheduled, big pharma will acquire the legitimate companies at very high valuations.

Biotech cannabis companies will be one of the major beneficiaries of the development of the cannabis industry. These companies are focused on developing treatments for patients who suffer from cancer, Multiple Sclerosis, Dravet's Syndrome, PTSD, and many other debilitating diseases. Hundreds of millions of people around the world suffer from these diseases. The development of FDA approved treatments is beneficial to the patient and their families, as well as to the companies.

To sum up, medical marijuana may never be viewed as common over-the-counter aspirin, but the research, and momentum of FDA and state approvals paint a very clear chart-like picture of upward growth potential.

By Michael Berger, President and Founder, Technical420.com

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