“It’s the wild west” is the phrase I often heard from investors in cannabis. Many stocks now sell below $5 a share, financial reporting is spotty, virtually every company loses money, and insiders are dumping their shares — typical behavior for the first phase of a new industry.

Last week I attended the Cannabis Science Conference in Baltimore. It was like having astronomers and astrologers in the same meeting. One group is speculating about the nature of dark matter while the other is confident that, when the moon is in the seventh house, love will steer the stars.

The state of cannabis science is, at best, primitive. For instance, Maryland’s lead regulator expressed a need to start testing against placebos. In other words, “Now that we’re selling this stuff, let’s find out if it works.” No one knows how CBD, the non-psychoactive molecule in marijuana, might reduce pain, but one scientist said that CBD seems to reduce inflammation, which is often the cause of pain. Promoters speak of cannabinoids, flavonoids, terpenes, and the “entourage effect” of the interactions among marijuana’s many complex compounds.

Products are unregulated or illegal, so cannabis dosages are not prescribed: doctors start at a low level and increase strength as they see fit. To be fair, this is not so different from the way psychiatric drugs are prescribed today: we throw groups of psychotropic drugs at patients until the patient reports feeling better. Science!

Many attendees were genuinely motivated — even desperate — to treat chronic pain or conditions that prevent them or their children from living normal lives. If you have ever suffered from sustained pain, you can understand why many people argue for legalizing cannabis — or any promising treatment. If you have not suffered chronic pain or witnessed it in a child, it is hard to imagine its detrimental effect on your life.

Dr. Bonni Goldstein grew up in Cherry Hill, attended Rutgers, and operates a pediatric practice in Los Angeles. She was the most persuasive speaker at the conference, but we heard a similar message from other doctors and pharmacists: cannabis products have significantly improved the lives of many patients — particularly those with seizures — who had been suffering with conventional medicine.

The FDA has approved the first cannabis-based drug, called Epidiolex, from Greenwich Biosciences, a division of GW Pharmaceuticals (GWPH). A UK company with an Enterprise Value (EV) of $4.6 billion and losses in the last four quarters of about 6 percent, GWPH has run from $101 to $177 this year and is now $167 a share. In the last three months insiders have sold 1.9 million shares with zero purchases. I don’t buy into money-losing companies when insiders are cashing out, but, if I believed GWPH would double, I would buy January, 2021, call options — a contract to buy a stock at a specified price on a specified future date — which would limit my downside risk and increase my return.

At the other end of the medical spectrum, you’ll find Medical Marijuana (MJNA), which sells for about 6 cents a share. What’s in a name? The ability to raise money. In the last four quarters, MJNA has lost $312 million on an EV of $233 million for a return of -134 percent. This holding company holds everything but profits and a plan.

MedMen has a two-page ad in Vanity Fair this month. MMNFF hit a high of $6.94 in 2018, sells for $2.78 today, and has a return on EV of -27 percent. As of November 1, 2018, MedMen had licenses for 69 retail stores and 17 cultivation and production facilities across 12 states. You can visit a MedMen store in New York on Fifth Avenue. The good news: MedMen has access to alternative cash sources like Gotham Green Partners, which invested $250 million in March, and shows revenue increasing quarterly to $30 million in the quarter ending December, 2018.

MedMen is establishing a high-end brand in a difficult environment: advertising is difficult because the product is federally illegal, so MedMen does not refer to cannabis. Distribution is difficult because all products must be made in the state in which they are sold — imagine doing that in any other industry! Getting dispensary licenses is difficult because each is expensive and you face local political adversaries. Essentially, MedMen is consolidating ahead of the market consolidation that is expected when cannabis is federally legal. If medical marijuana becomes federally legal, MedMen would have immediate ability to reduce costs and would be a logical acquisition for any large company seeking distribution. MedMen is not a perfect company, but it’s an interesting bet.

Gotham Green Partners also invested in iAnthus Capital Holdings (ITHUF), which owns 21 dispensaries, though sales are a puny $3.4 million for all of 2018. Buy MedMen instead because its 10X topline (gross) sales.

Tilray (TLRY) sells its medical cannabis in 12 countries. The company has an EV of $5.4 billion and lost $68 million in the last four quarters. Insiders sold a net 759,440 shares in the last three months. Sell.

Kush Holdings (KSHB) is a grab bag of packaging, products, and marketing services for cannabis companies. In the last four quarters the company had a return of -3.9 percent on EV; insiders had net sales of 3.3 million shares in the last 12 months. The company is restating its 2018 and 2017 reports for accounting errors. Avoid.

Aurora Cannabis (ACB) reported a profit for 2018, but its fiscal year ends on June 30. In the fourth quarter ACB lost $239 million on sales of $54 million. Its $9 billion EV is very expensive. Sell.

The only profitable company I found is Innovative Industrial Properties Reit (IIPR), which earned about 1 percent on its $805 million EV. IIPR is a self-advised Maryland corporation focused on the acquisition, ownership, and management of specialized industrial properties leased to state-licensed operators for regulated medical-use cannabis facilities. IIPR pays a 2 percent dividend and probably expects to make money by charging higher rates for specialized facilities. This is interesting, but the business model could fall apart if marijuana is federally legalized. Without the requirement to grow in-state, high-cost local facilities will close, and marijuana will be farmed like corn in the cheapest available spot.

Many other small money-losing companies vie for attention in the marijuana gold rush. Supply has recently exceeded demand in Canada, so prices will fall, and Barron’s reports that profits are suffering from poor quality weed. In distribution, MedMen is winning the branding game.

The golden opportunity in marijuana will be in replacing opiates, which have killed 700,000 Americans in the last 20 years. Cannabis, it appears, has marginal side effects. Once U.S. labs are free to study the plant’s DNA, scientists will adjust branching structures and heights so plants can be efficiently farmed. Instead of optimizing for psychoactive THC, cannabis will be optimized for compounds that manage pain, seizures, anxiety, fibromyalgia, colitis, lupus, insomnia, PTSD, rheumatoid arthritis, and palliative care.

Astrologers have heralded the marijuana market so far. The business will be more interesting when scientists take over.

Send feedback to gpaul@perfectcompany.com. Investment recommendations are solely those of the columnists, and are presented for discussion purposes. Columnists may own shares in recommendations. Investors are advised to conduct their own research and that past stock performance is no guarantee of future price.

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