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The news regarding the legalization of marijuana in several states hit us just before the 2012 holiday season. While it is true that the focus of Washington, and much of the markets has been on the fiscal cliff, the legalization movement has been growing steadily.

On Christmas Day 2012 it was announced that marijuana growers in D.C. cleared regulatory hurdles.

Fifteen years after voters gave the green-light to a medical marijuana program in the nation's capital, a pair of locations approved to grow or sell the drug have cleared regulatory hurdles and will set up shop a few months into the new year, according to city officials.

A cultivation site in the Northeast quadrant of the city obtained its certificate of occupancy this month, meaning it can grow marijuana once the D.C. Department of Health completes a final inspection. It is one of six sites approved to grow the drug for medical purposes before it is sold at one of five dispensaries scattered across the city. One such dispensary, located just a mile north of the Capitol, also obtained its occupancy documents.

The irony here is that the local district of D.C. will soon have legal marijuana businesses surrounding the legislators who have not legalized it on a Federal level. In other related news, Futurist Thomas Frey believes what Napa Valley is to wine, Washington State and Colorado will be to America's emerging marijuana industry.

Some advocates of repealing or relaxing Pennsylvania anti-marijuana laws say they are encouraged by referendum votes to legalize recreational use of the drug in Colorado and Washington state, but Gov. Tom Corbett vows to veto any such bill. Huffington Post recently did a piece on other countries' marijuana laws, which are mostly more liberal than in the U.S.

Health News

Recently it's been discovered that marijuana helps Crohn's disease and ulcerative colitis.

Crohn's disease and ulcerative colitis, the two main types of inflammatory bowel disease (IBD), are a challenge to treat. Among the potential treatment options is marijuana, and several recent studies indicate that this unconventional option offers some significant benefits.

Conclusion -- Long Marijuana stocks

This can be good for marijuana-related stocks. In a previous article, we built a pot portfolio all of which could have a positive impact from the growing trend of legalization. To recap, the portfolio is based on the following issues.

Here's the pot portfolio list:

Also, this is a further confirmation that in fact this the next growth industry, and not just a passing fad like the pet rock. Regardless of how big the industry grows to become, it seems that it will at least grow to become something substantial, and not go up in smoke.

Best of the Bunch

If you had to pick two of the best issues in the above portfolio, they would be Medbox and Medical Marijuana.

Medbox

In the case of Medbox, it is a bit ahead of the curve compared with some of the other companies. This is due to its market position and technology patents. It holds several patents and has the ability to scale out as more states legalize.

So what is so promising about this company from the balance sheet perspective? A couple of patents in the coffers help raise the barriers of entry substantially and help divert the focus away from the lower revenues of only $8 million since 2010. Obviously this is an investment opportunity in which most of the "reward" of the equation can't be found on the balance sheet so it's up to the investor to decide exactly how much that is worth. The main roadblock is that the consumer market has its hands tied in terms of whether or not they can use/buy this; therefore, they have limited revenue under current law.

That means a buy in Medbox is also a bet on legalization, not so much the company itself. Also being in the distribution business they are a needed part of the distribution chain for any type of Marijuana product sold, be it medical or other.

The most important fundamental factor about Medbox isn't about the company itself, it's about its recent rise up 3000%. Whoever was bidding up the stock has it in their alerts and if there is any big announcement such as more states legalizing, Medbox is already on the investor's radar. That isn't to say it will enjoy the same rise, but compared with other companies, it may make more sense to go long Medbox only because of it's previous exposure. This is more powerful than the actual fundamentals of a company in this situation, as a severe price rise that we are hoping for is based more on hype and emotion and perception than company fundamentals.

That isn't to say Medbox isn't a fundamentally sound company, simply that even if it weren't, the perception is in this case more important than the fundamentals, and Medbox has the best market perception.

Medical Marijuana

MJNA is officially the first public company with a core business of medical marijuana. As the legalization continues by state to state, likely the medical will preclude full legalization. Medical Marijuana has been found to have many medicinal purposes, such as being a non-lethal treatment for Arthritis, Glaucoma, Epilepsy, Depression and many other ailments. As more doctors come forward about their support on the issue (which is a growing trend), it will further solidify the use of Medical Marijuana, which (OTCPK:MJNA) will be able to take advantage of.

See the company's website for more detailed info about its holdings. The company is very serious about its research as posted on the website. It hosts a lot of industry research from Medical journals with important facts such as Marijuana's 55,000 known medical uses:

Medical Marijuana and Industrial Hemp are both a species derived from the Cannabis. L. Sativa plant, but are completely different in their medical and industrial applications. Today, Cannabis has over 55,000 known uses from medicinal to industrial applications such as concrete, building materials, textiles, animal feed, fuel as well as a food which millions of people a day enjoy. What both of these species have in common is that they are grossly under utilized and misunderstood.

The History of Hemp as an industrial and medicinal product dates to the beginning of recorded history. It has been estimated that marijuana in the United States alone is a $110 billion market and the medical market makes up nearly $1.7 billion. Industrial hemp with its many uses such as fuel, food, textiles, building materials, and bio-remediation is nearly impossible to quantify. Today the industry is fragmented and grossly under utilized, and under developed for a number of reasons that stretch date back hundreds of years. Mostly because of a stigma created from one species of the Cannabis plant that has a significantly higher amount of tetrahydrocannabinol (THC) and can be used as a recreational drug.

MJNA Investor fact sheet

This company has chosen to focus on the medical side of the business and based on the research on its website, it has a more scientific approach toward developing products and possibly even licensing them to other pot companies (as opposed to being in distribution or growing). This should be encouraging for investors.

For example, it recently did a trial of its cannabis gum, through its portfolio company CanChew.

How to analyze pot stocks

Having a traditional analysis of a stock in this industry is simply inappropriate. No traditional analysis would have guessed that Medbox would have gone up 3000%. New growth industries are uncharted waters, and always have a high risk. The risk here isn't losing, although that is possible. The high risk in industries like this, is the unknown. There are an enumerable amount of variables that can have an effect on the "pot stocks" - forecasting their price would be like seeing the future. This is in comparison with more traditional, established companies where proper financial analysis can give you a good indication of where the price might be in the future. You have more data points, more information, and many fewer unknowns.

So analysis of pot stocks shouldn't take the traditional form of P/E analysis or similar. We need to look at social and political trends (as the legalization would cause these companies' stock prices to increase), what the company's core business is, and what the market perception is. It's not an unprofessional analysis (like grannies complaining about inflation when they spend more money at the grocer), it's all that's available. Traditional analysis would have shown that all these stocks are worthless, but of course they would have said the same about Medbox before it was up 3000%. Not to suggest that pot stocks are the next tech sector, but that analysis would have said the same about Google (NASDAQ:GOOG) in its infancy.

It's the fallacy of any startup, any new industry. No one wants to be the first investor. But if there was no first there can be no second. Without innovation, the economy would stagnate.

Paradigm Shift

Thomas Kuhn described the process of industry cycles (creation, growth, saturation, decline) as scientific revolutions (cultural revolutions), and subsequently coined the term "paradigm shift," which nearly became cliche describing what happened to the tech sector. The tech sector was not the first such industry that came out of nowhere and experienced substantial growth. In fact it's been happening in human society since the Neolithic period.

Wim Grommen describes this in a paper "Present Crisis Pattern, End of the Third Industrial Revolution" :

In general transitions can be seen to go through the S curve and we can distinguish four phases (figure 1):

  • a pre-development phase of a dynamic balance in which the present status does not visibly change
  • a take-off phase in which the process of change starts because of changes in the system
  • an acceleration phase in which visible structural changes take place through an accumulation of socio-cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  • a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

This chart can be used to explain the product cycle, but also the markets. If you look at stock prices the last 10 years, such as Microsoft (NASDAQ:MSFT), they've been relatively flat. Microsoft is a great company, that has great management and a host of products that enable businesses to function, but yet the stock price is flat the last 10 years. The same can be said for many such companies, including but not limited to IBM. The reason has nothing to do with the companies themselves, but with the fact that they cannot experience the growth they had during their acceleration and take-off phase. They have saturated markets, and have explored all possible ways to extract profits from the real economy. What keeps them from declining are exploring new markets like BRICs, and continually innovating their existing product line.

Of course it should be known without mentioning, the Marijuana industry is pre take-off and pre acceleration.

Why explain this in an article about the pot industry? Investors who are looking for the next Medbox, the Google of the pot industry, need to look past traditional fundamental analysis, which simply isn't appropriate. Yes, on some level any investor in a new growth industry is taking a bit of a stab in the dark, because of the plethora of unknown risks. For every Amazon (NASDAQ:AMZN) there were many e-toys and father.coms and other startups, many of which most people have never heard of.

On Medical Marijuana's website it directly references the $110 Billion figure, and the fact that there are many methods of ingesting THC without smoking. Actually the debate over is pot unhealthy is more about smoking vs. other methods; THC itself administered in correct amounts is not unhealthy. But smoking anything vs. ingesting orally or by other means always has health risks not found in direct injection.

So based on this, we believe some of these companies, and especially Medical Marijuana and Medbox, are poised to capitalize on the next growth industry, and therefore investors who want to participate in the Marijuana industry should go long and hold.

Source: Marijuana Industry Support Grows - 2 Stocks To Own If It Hits