How Hedge Funds Were Passing Around Marijuana Stocks in Q2

Even to people who are against the legalization of marijuana, it is common knowledge now that the legal marijuana industry is growing at a rapid pace and this growth should continue for many years. In 2015, the industry grew by 17% to $5.4 billion in annual sales and estimates suggest that it will grow by a further 25% this year to $6.7 billion. With more states seriously considering legalizing the use of marijuana for recreational purposes, in addition to the four states that have already done so, to a regular investor, it might seem that now is the best time to jump on the cannabis bandwagon.

However, smart money doesn’t seem to share the same view on the industry. Research done by Insider Monkey on the portfolios over 745 hedge funds we track shows that going into the third quarter, hedge funds as a group weren’t overly excited about many of the top names in the industry. In this article, we’ll take a look at the five most popular marijuana stocks at the end of June among the group of successful hedge funds that we track and will discuss the performance of those stocks so far this year.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

#5 22nd Century Group Inc (NYSEMKT:XXII)

– Hedge Funds with Long Positions (as of June 30): 2

– Value of Hedge Funds’ Holdings (as of June 30): $38,000

First up is 22nd Century Group Inc (NYSEMKT:XXII), which was owned by two hedge funds in our system on June 30. Shares of the New York-based biotechnology company have been on a permanent downtrend since March 2014, land have lost over 21% of their value in 2016. In April, Crede Capital, with whom 22nd Century Group Inc (NYSEMKT:XXII) terminated its joint merger last year due to non-performance and other breaches, filed a lawsuit against the company. Most analysts who track 22nd Century Group think that Crede Capital’s lawsuit doesn’t have any merit and that the concerns among investors regarding it are overblown. On August 10, 22nd Century Group reported its second quarter results, declaring a loss of $0.44 per share on revenue of $2.83 million, in-line with earnings estimates and topping revenue expectations by $130,000.

#4 Cara Therapeutics Inc (NASDAQ:CARA)

– Hedge Funds with Long Positions (as of June 30): 8

– Value of Hedge Funds’ Holdings (as of June 30): $9.64 Million

The year 2016 is turning out to be a terrible one for Cara Therapeutics Inc (NASDAQ:CARA), as the company has lost almost 65% of its market capitalization. That has led to hedge funds fleeing the stock, as just eight in our database had long positions in it at the end of June, down from 14 at the end of March. Despite the massive beating that the stock has taken this year, several analysts continue to remain bullish on the company, citing the four pipeline drugs it has in development currently, three of which are close to being commercialized. On August 7, analysts at Needham & Company reiterated their ‘Buy’ rating on the stock, but lowered their price target on it to $23 from $27, which represents potential upside of nearly 310% from the stock’s current price.

On the next page we’ll roll out the three most popular marijuana-related stocks among hedge funds.

#3 Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)

– Hedge Funds with Long Positions (as of June 30): 9

– Value of Hedge Funds’ Holdings (as of June 30): $29 Million

Moving on, the number of hedge funds in our system that were long Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) inched up by one during the second quarter, to nine. However, the aggregate value of their holdings in the company dropped by 40% during the period. Hedge funds that increased their stake in the company during the second quarter included billionaire Jim Simons‘ Renaissance Technologies and Gavin Saitowitz and Cisco J. Del Valle’s Springbok Capital. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)’s stock has lost over 80% of its value since the beginning of 2013 and has been extremely volatile this year. Earlier this month, the company announced that its chief scientific officer, Dr. Dominic Behan, who is also one of the co-founders of Arena, will be resigning from the company and heading to Beacon Discovery Inc., which will conduct research for Arena Pharmaceuticals under contract. Dr. Behan is the second co-founder to have resigned from the company in the last year, though most analysts see the change of guard as a positive move.

#2 Insys Therapeutics Inc (NASDAQ:INSY)

– Hedge Funds with Long Positions (as of June 30): 17

– Value of Hedge Funds’ Holdings (as of June 30): $254.32 Million

The ownership of Insys Therapeutics Inc (NASDAQ:INSY) among the funds tracked by Insider Monkey remained unchanged during the second quarter, though the aggregate value of their holdings in it slid by $44.9 million. In the last two years, Insys Therapeutics Inc (NASDAQ:INSY)’s stock has made an inverted V-shape pattern, reversing the uptrend it saw from mid-2014 to mid-2015 in the period since. Shares of the Arizona-based specialty pharmaceutical company did spike by over 9% on August 24 after it announced successful results from its Phase 3 study assessing Buprenorphine Sublingual Spray, which is meant for the treatment of moderate-to-severe postoperative pain in patients undergoing bunionectomy. Most analysts who track Insys Therapeutics are of the opinion that the stock undervalued, as it is trading at a forward P/E of 15.06 and a price-to-book multiple of 3.92, especially when one takes into account the strong fundamentals of the company and the FDA approval of its new drug ‘Syndros’, which has the potential to double the revenue of the company in the coming years.

#1 GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH)

– Hedge Funds with Long Positions (as of June 30): 17

– Value of Hedge Funds’ Holdings (as of June 30): $394.7 Million

GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) was also held by 17 hedge funds in our system at the end of the second quarter, and the aggregate value of their holdings in the stock jumped by over 100% during the quarter. It is also the only stock in this list that is trading in the green this year, being up by 44%. Shares jumped in March after the company announced positive results from a Phase 3 clinical trial assessing its drug, Epidiolex (cannabidiol), and then again more recently on rumors that the company is working with an investment bank after receiving takeover proposals from unnamed entities. Even though GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) hasn’t yet commented on the takeover rumors, some analysts are skeptical about them. The reason for their skepticism arises from the fact that in July, the company completed a secondary offering of 3.22 million American Depositary Shares (ADSs) and the lock-up period for its executives to sell their shares following the completion of the secondary offering ends in mid-October. According to those analysts, the takeover rumor could just be an attempt by someone who isn’t subject to the lock-up period to create a liquidity event in order to offload his or her shares before the lock-up period expires. On September 8, analysts at Cantor Fitzgerald reiterated their ‘Buy’ rating on GW Pharmaceuticals’ stock and set a price target of $165 on it, suggesting upside potential of over 65%.

Disclosure: None