How To Profit from Pot Stock "Pure-Plays"

Lou Basenese

Tuesday, November 05, 2019

Last week, I reminded you about a reliable way to spot winning investments:

Patent filings.

Patents are a surefire indicator that a company is on the cusp of innovation. And in many cases, such innovation can lead to a sharp increase in a company’s sales, profits, and share price.

So if we’re aiming to earn maximum profits from the marijuana boom, we should buy shares in the companies that hold the most pot-related patents, right?

Let’s take a look…

These Companies Hold 70% of Pot-Related Patents

After digging into the research, I discovered that 70% of pot-related patents are held by big pharma companies.

I’m talking about huge companies like AbbVie (ABBV), which has a market cap of $122 billion. Or Merck (MRK), with a market cap of $214 billion. You can see the full list of big patent holders in this chart:

But if you’re seeking maximum pot profits, investing in these companies won’t do you much good.

You see, big pharma companies like AbbVie or Merck have dozens of drugs in the pipeline at any time — and most of these drugs have nothing to do with cannabis.

So investing in these companies to profit from the cannabis boom makes no sense. They don’t offer you significant exposure to cannabis — and even worse, they give you exposure to markets you might not be interested in at all.

That’s why it’s so important for investors to identify companies that focus purely on cannabis…

In other words, “pure-play” cannabis companies…

The Benefits of Pure-Plays

For example, a pure-play medical pot company focuses exclusively on cannabis-based therapies.

There are two main benefits of investing in such a company:

  1. A company focused on just one thing is easier to analyze than a company going in many directions at once. And the easier it is to analyze a company, the easier it is to be right about our decision to invest in it.
  2. Since pure-plays give us maximum exposure to a particular trend, they can lead us to significantly higher gains. We’re talking about the difference between earning a 50% return in a diversified investment, versus a 500% or 1,000% return (or more) from a pure-play.

Getting back to our list of the top holders of pot-related patents, I count only two pure-plays: GW Pharmaceuticals (GWPH) and Cara Therapeutics (CARA).

I’m also aware of two other companies that don’t show up on the list yet: Zynerba Pharmaceuticals (ZYNE) and Therapix Biosciences (TRPX).

But that’s it! Only four in total. That’s slim pickings…

As a comparison, the list of pure-play 5G stocks includes dozens of companies to choose from.

Few Shots on Goal

Making matters worse, these pure-play medical pot companies have only a tiny handful of product candidates in the pipeline. Consider the counts:

  • GWPH – 4
  • CARA – 5
  • ZYNE – 4
  • TRPX – 4

That means a single trial failure could sabotage your entire investment.

In fact, that’s exactly what happened to Zynerba shareholders in the summer of 2017. On the heels of bad trial data, the stock cratered: investors lost as much as 68% of their money in days.

Bottom line: these pure-play medical pot stocks have very few shots on goal.

So they can’t afford to “miss.”

Big Pot Profits (and Downside Protection)

As you learned today, there are very few pure-play medical pot stocks to invest in…

And the ones that do exist are fraught with risk and should be avoided.

I’d never recommend putting your hard-earned money on the line for “all or nothing” bets like these.

So what can you invest in to capture the biggest profits from the cannabis boom? And just as importantly, how can you protect your downside?

Stay tuned — because tomorrow, Matt will fill you in!

Ahead of the tape,