How Hedge Funds Traded Marijuana Stocks in Q1

The legalization of marijuana for recreational use in some regions has not only led to the formation of small companies that grow and sell marijuana, but has also given a boost to research that uses cannabinoid and other compounds in the plant to develop medicinal treatments. However, there are still some reservations with regard to pot companies, with a recent episode sparking controversy. MassRoots, a social hub for cannabis users, was denied a listing on the Nasdaq stock exchange on the grounds that it is “aiding and abetting the distribution of an illegal substance”. The company said it will appeal the decision, since Nasdaq has already allowed the listing of several biotechnology companies that use ingredients extracted from the plant. Since the use of marijuana is still illegal on a federal level, MassRoots will probably lose the appeal. That aside, let’s take a look at the stocks of five companies which deal with marijuana on some level, and see how hedge funds were trading them in the first quarter.

While there are many metrics that investors can assess in the investment process, hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor beat the S&P 500 by around 95 basis points per month (see more details here).

MaryJane for Pain (Relief)

First up is Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), a biopharmaceutical company that develops drugs that target G protein-coupled receptors. One of the drug candidates currently being developed by the company, ADP371, aims to provide pain relief without causing dependency on marijuana or its potential psychotropic effects. Hedge fund interest in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) cooled down a bit during the first three months of 2016, as the number of long positions reported as of the end of the quarter dropped to eight, down from ten as of the end of December. Arena Pharmaceuticals’ stock chart resembles a roller coaster so far this year, with the ride having taken shares down by 17% so far this year. For the first quarter, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) posted a 19.7% drop in year-over-year revenue to $9.8 million, along with an EPS loss of $0.09. Peter Kolchinsky boosted his fund’s stake in the company by 8% during the quarter, to 9.36 million shares worth $18.4 million.

Hedge Funds Not Giving Up On Cara

Hedge fund sentiment towards Cara Therapeutics Inc (NASDAQ:CARA) was unchanged come the end of March, with 14 of the funds tracked by Insider Monkey having reported a stake in the company. Cara Therapeutics Inc (NASDAQ:CARA) received a boost in April when the U.S. Food and Drug Administration (FDA) removed its hold on the Phase 3 trial of Cara’s I.V. CR845 candidate for postoperative pain, which had been put in place in late February due to concerns over a spike in the sodium levels of some patients. However, shares have gradually trended back down since the announcement and are down by an unsightly 63% since the start of 2016, as investors appear to worry that the treatment will ultimately fail to gain FDA approval. Jerome Pfund and Michael Sjostrom‘s Sectoral Asset Management held the largest stake in Cara Therapeutics Inc (NASDAQ:CARA) at the end of March among the funds in our database, totaling 1.21 million shares worth $7.54 million.

Turn the page to find what hedge funds think about three other marijuana stocks.

Treating Epilepsy with Marijuana

As of the end of the first quarter, roughly 26% of Insys Therapeutics Inc (NASDAQ:INSY)‘s common stock was held by 17 elite hedge funds in our database, down from 20 funds with holdings as of the end of the fourth quarter. Earlier this week, Insys Therapeutics announced the completion of the Phase 1/Phase 2 dosing study of its synthesized marijuana cannabidiol (CBD), as it tries to catch up with GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH). The latter is already conducting Phase 3 testing of its own CBD, Epidiolex, designed for patients suffering from epilepsy. Insys Therapeutics Inc (NASDAQ:INSY) said it is looking forward to meeting with FDA representatives to discuss Phase 3 trials. The company is also preparing to study the effect of its version of CBD on Dravet syndrome and Lennox-Gastaut syndrome, two rare forms of pediatric epilepsy. Samuel Isaly‘s OrbiMed Advisors holds 4.55 million shares of Insys Therapeutics Inc (NASDAQ:INSY) as of March 31, up by 5% over the first quarter.

Treating Epilepsy with Marijuana, Part 2

GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) has also maintained its status among the funds followed by Insider Monkey, as the number of funds holding the stock at the end of March remained unchanged from the end of December at 18. Together these funds held ownership of 18% of the company’s outstanding stock. GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) has been researching the use of medicine derived from cannabinoids since 1990 and has successfully developed Sativex, a drug for the treatment of multiple sclerosis symptoms. Having fallen by 43% by mid-March, GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) jumped by 120% on March 14 after the British company announced favorable results from its study of Epidiolex. The drug was designed to address the effects of Dravet syndrome, which affects children under one-year of age. GW Pharmaceuticals said its candidate reduced monthly convulsive seizures by 39%, compared to a 13% reduction from the use of a placebo.

Taking the Pot Out of Pot

22nd Century Group Inc (NYSEMKT:XXII) is a plant biotech company that develops technologies for reducing the level of nicotine in tobacco plants and the level of cannabinoids in cannabis plants. At the end of the first quarter, the stock was not held by any of the funds that we track. Ken Griffin‘s Citadel Investment Group previously held a minor stake of some 7,000 shares on December 31 that were liquidated during the quarter. 22nd Century Group Inc (NYSEMKT:XXII)’s genetic engineering technology allows it to modify the level of nicotine in tobacco plants. This means they can grow plants with increased levels of nicotine for avid smokers or tobacco plants with 97% less nicotine for those who want to quit smoking. Due to their expertise in manipulating tobacco, 22nd Century Group Inc (NYSEMKT:XXII) has recently launched an initiative to produce medically-important cannabinoids in tobacco plants, claiming this could lead to an acceleration in the development of medical products derived from cannabinoids. Shares of the company are down by 39% this year.

Disclosure: None