Hedge Funds Think These 4 Marijuana Stocks Are Pretty Dope

A few years ago, most investors could not even fathom investing their money in companies dealing with illegal drugs. After all, the DEA still classifies marijuana as a Schedule 1 illegal drug, same as heroin and other narcotics. However, as States started to legalize its medicinal use, an industry began to emerge. Furthermore, with the legalization of the recreational use of the drug in Colorado and Washington back in 2012, marijuana companies (pharmaceuticals, growers, etc.) not only emerged and grew, but also went public. According to a leading marijuana industry investment and research firm, legal cannabis sales reached $5.4 billion in 2015, while for 2016, they anticipate $6.7 billion in revenue. ArcView Market Research projects $21.8 billion in sales by 2020, while Marijuana Business Daily thinks they could reach $44 billion. While this industry is still green (pun intended), a few stocks have already gone mainstream, exiting penny territory and even cultivating plenty of hedge fund support. We’ll take a look at four such companies in this article, which count the backing of several relevant institutional investors.

At Insider Monkey, we track more than 800 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details here).

Let’s start with Insys Therapeutics Inc (NASDAQ:INSY), which counted the support of 20 funds among those that we track as of the end of the fourth quarter, up by 33% quarter-over-quarter. Their stakes, valued at $507.9 million on December 31, accounted for almost 25% of the company’s total shares. Among those investors was Matt Sirovich and Jeremy Mindich’s Scopia Capital, which disclosed ownership of 5.82 million shares as of the end of 2015. However, taking advantage of the big decline in the stock, which fell by more than 44% between January 4 and March 10, the firm boosted its exposure, having declared a holding of 7.43 million shares on March 10.

While good news pumped the marijuana industry as a whole this week (see below), Insys Therapeutics Inc (NASDAQ:INSY) might be facing some trouble. Last Thursday, Glancy Prongay & Murray LLP announced that it had filed a class action lawsuit on behalf of multiple investors who purchased the company’s stock between March 3, 2015 and January 25, 2016. The legal firm alleges that over the aforementioned period, the company “issued materially false and misleading statements to investors and/or failed to disclose that: (1) Insys was engaged in the illegal and improper off-labeling marketing of Subsys; (2) certain Insys employees were complicit in an illegal kickback scheme operated for the purpose of increasing prescriptions of Subsys; and (3) as a result, Insys’ financial statements were materially false and misleading at all relevant times”, as stated in a press release issued by Glancy Prongay & Murray LLP.

Next up is GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH), which was in the spotlight this week and more than doubled in price on Monday, pulling up several other marijuana stocks with it, after the company announced that its Orphan Drug and Fast Track-tagged Epidiolex (cannabidiol) enjoyed positive results in a Phase 3 clinical trial for the treatment of Dravet syndrome, a rare and still untreated form of childhood epilepsy. According to the results, the drug considerably reduced seizures experienced by the children in treatment.

18 funds in our database must be particularly happy with the recent spike seen in GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) shares. Among the firms that disclosed long stakes in the company as of the end of December was Anders Hove and Bong Koh’s VHCP Management. Its stake, comprising 311,853 shares, was the third-largest in its portfolio in terms of value at the end of 2015. Also bullish was Deerfield Management, the healthcare-focused fund run by James E. Flynn, which held 310,122 shares of the company at the end of the fourth quarter.

Next up is Cara Therapeutics Inc (NASDAQ:CARA), a clinical-stage biopharmaceutical company focused on pain treatments, which counted the support of 14 funds in our database on December 31. Those stakes represented roughly 15.5% of the company’s total shares and were valued at more than $71 million on December 31. The largest position was held by Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, a 1.21-million share position worth more than $20 million. However, Steve Cohen’s Point72 Asset Management surpassed Sectoral Asset Management early this year, taking advantage of the tumbling stock prices to increase its stake in the company to 1.43 million shares on February 16, from 530,200 shares on December 31,. Cara shares are down by more than 72% year-to-date and were not helped by the recent marijuana stocks rally.

Cara Therapeutics Inc (NASDAQ:CARA) recently reported its fourth quarter financial results, which missed estimates. The company posted a net loss of $0.35 per share, $0.02 worse than what the Street expected. That took the company’s full year loss to $24.7 million, or $1.00 per share. Revenue came in at $3.8 million.

Lastly, let’s look at Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), a small-cap biopharmaceutical company focused on the discovery, development and commercialization of drugs that target G protein-coupled receptors. As of the end of the fourth quarter of 2015, the company had 12 supporters among the funds that we track. The largest investor in our database was Stephen Dubois’ Camber Capital Management, which held 10.5 million shares worth almost $20 million on December 31.

A couple of weeks ago, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) reported its fourth quarter financial results. A net loss of $0.13 per share was in-line with expectations, but revenue of $7.8 million, down by 15.1% year-over-year, missed estimates by $460,000. On Monday, the stock gained 2%, driven by the surge in GW Pharmaceuticals, but also by the news that its own drug, Belviq, enjoyed a 3.5% increase in sales over the past week, hitting a new 2016 high, barely shy of 10,000 scripts.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned in this article.