Marijuana, LSD, Cocaine Now Legal in Mexico. Will the Economy Benefit?

Now that Mexico has decriminalized marijuana, LSD, heroin, methamphetamine, and cocaine in small quantities, investors are taking a closer look at companies that may benefit from the increased Mexican tourist trade. On Monday, August 24, laws were passed in Mexico to very little fanfare which eliminated crimes for possession of small amounts of these substances. Now individuals can possess up to a half-gram of cocaine and 40 grams of marijuana. The reasoning behind this change was that crackdowns didn't seem to reduce the violence and deaths from the war on drugs.

Back in January of this year, we featured an article about all the various publicly traded companies that are involved in the marketing of marijuana or its cannabinoid-based pharmaceutical products. Since that time, a couple of new publicly traded stocks have appeared on the horizon with marijuana or cannabis in their name. These may be interesting yet speculative very low cap plays if California and other states change their laws to legalize or decriminalize marijuana.

One stock sector worth checking out might be the Mexico based companies. An example would be Fomento Economico Mexicano, S.A.B de C.V (FMX), also known as FEMSA, which is the largest beverage company in Mexico, and for that matter, all of Latin America. They produce many popular beers including Carta Blanca, Tecate, Tecate Light, Superior, Sol, Dos Equis Lager, and Dos Equis Ambar.

A more general way to play the Mexico stock market is through an ETF, iShares MSCI Mexico Investable Market Index Fund (EWW). There are also a couple of closed end funds such as the Mexico Fund, Inc. (MXF) and the Mexico Equity & Income Fund Inc. (MXE).

However, the stock play from this change would probably be in the travel industry, stocks that might take advantage of the "Spring Break" effect. For example, there are a couple of cruise lines with trips to Mexico that include Carnival Corp. (CCL) and Royal Caribbean Cruises Ltd. (RCL). The Mexican airline industry might benefit also, especially if fuel prices soften, since there seems to be recovery taking place from the swine flu outbreak. A couple companies in that sector include Grupo Aeroportuario del Centro Norte S.A. de C.V. (OMAB) and Grupo Aeroportuario del Pacifico (PAC).

It will be interesting to see how this significant change in Mexico's laws will affect travel and the economy south of the border.

Disclosure: Author does not own any of the above.

Comments

[Daniel Herkes]

Let's do invest in an immoral habit. Drugs are evil, right?

2009 Aug 30 09:07 AM

[searcher]

This is the age immune to satire. Both the sublime and ridiculous harbor their burlesques. Has there ever been a time more congenial to the inanity of fantasy?

2009 Aug 30 11:08 AM

[Danny Furman]

Cemex (CX) is still the only Mexican company worth looking at. The cruise lines would be interesting if it wasn't for H1N1, but Mexico is where it all started. Even junkies here in California have little incentive to get drugs in Mexico, given murder rates and difficulty of smuggling back to the US (not to mention domestic availability of narcotics). Distribution needs to be legal for economies to be impacted.

2009 Aug 30 11:09 AM

[Karen Consumer]

Drugs may be legal, and American tourists (college kids) may be more inclined to WANT to go down to Mexico, but the police force still has a problem with corruption, and even in the tourist towns (Acapulco, Tijuana) the traffickers outnumber the police. But with limited access to credit, limited access to jobs, and parents holding the purse strings (ultimately) I don't see this boosting Mexican companies bottom line all that much.

2009 Aug 30 01:11 PM

[MDLGTO]

I applaud this law--however, its effects on markets short term will be negligible. Rather, it is a part of a series of steps used to create a stable and secure state. With regard to markets, Mexico fund appears to have nearly doubled since its March low. Part of this bounce is due to the currency stabilization (Dollar is sinking against even the lowly peso folks!-from over 15 pesos to the dollar to about 13), part to appetite for risk, etc. I cannot see how the law would logically lead to a cue to trade in Mexico as a whole. With regard to specific companies, Spring Break effect is likely mitigated by threat of narco-violence (the probability of encountering such greatly increased by risk seeking behavior)-very true on traditional low-end spring break havens like border towns where tourism is dead. I can't imagine that family / geriatric focused cruise lines will somehow decay into Amsterdam coffee houses. Which, by the way, have you tested your thesis with Amsterdam vs. rest of Europe?

With regard to Daniel Herkes's comment above: What is your point? Obviously alcohol and tobacco are worthy of investment (consumer discretionary) and immoral to various interests. The line is arbitrary and, I'd imagine, closely allied with corporate and political entities. The author's thesis is weak. But, can you imagine the IPO value of the secure drug distribution routes into and through the US, were they legal?

Disclosure. Live in Mexico; Long RC, MO

2009 Aug 30 02:00 PM

[Daniel Herkes]

My point is this:

In the States we have educational programs, DARE for example, that teach children that illicit drug use is bad. I taught my children that drugs are bad. I am not wrong about that, am I?

That is not an arbitrary point. Draw a line in the sand, and stand on one side or another.


On Aug 30 02:00 PM MDLGTO wrote:

> With regard to Daniel Herkes's comment above: What is your point?
> Obviously alcohol and tobacco are worthy of investment (consumer
> discretionary) and immoral to various interests. The line is arbitrary
> and, I'd imagine, closely allied with corporate and political entities.
> The author's thesis is weak. But, can you imagine the IPO value of
> the secure drug distribution routes into and through the US, were
> they legal?
>
> Disclosure. Live in Mexico; Long RC, MO

2009 Aug 30 06:01 PM

[AuGod!]

Either a society is free or it isn't. Individual freedoms might include the "pursuit of happiness". You have heard of this? Happiness has many roads. Admittedly, it is a slippery slope and being free has responsibilities not just rights attached. Legislation based on the greatest good for the greatest number of people is to respect and enfranchise a populace. To do otherwise is not a democracy. If a percentage of people want to waste themselves by overindulgence in marijuana, LSD, heroin, methamphetamine and cocain, then let them. Addiction of some kind and various life choices leading to misery have always been an option to some throughout History. In small quantities, as much as large, decriminalization does tend to legitimize the growth, production and sale of the products with all of the bad stuff which accompanies that. But not all "users" are "criminals" in the classic sense. In the United States, the largest consumer of said commodities, a tax on them might be useful - not only to help the treasury but those who abuse it and need medical intervention and treatment. I know there are a few Wall Street types who would pay a few extra bucks per line.

2009 Aug 30 07:13 PM

[Daniel Herkes]

I am not confusing substance abuse with freedom. There is no confusion there! Give me a society that is free from recreational drug use. I am not talking about alcohol either. There is a special place in hell for the people who manufacture, sell, and otherwise profit from human misery.

I choose to live in a country that is willing to take a higher road. I understand that my fellow citizens may well use these terrible substances. But it's clear that they are doing so as a crime. There will be no point in taxing them either; the drug lords have always circumvented such schemes.


On Aug 30 07:13 PM AuGod! wrote:

> Either a society is free or it isn't. Individual freedoms might include
> the "pursuit of happiness". You have heard of this?

2009 Aug 30 07:53 PM

[Daniel Herkes]

The France of Rostand's time was close . . .


On Aug 30 11:08 AM searcher wrote:

> Has there ever been a time more congenial to the inanity of fantasy?

2009 Aug 30 07:55 PM

[Ikiru]

Why would anyone go to Mexico to purchase small quantities of illicit drugs that are easily purchased anywhere in the US, including most of its prisons? There are no 'coffee shops' in Mexico City like the tightly regulated ones in Amsterdam, making it easy for tourists to buy their cannabis openly.
A better approach might be to take a look at fast spread of medicinal marijuana laws sweeping our own country. These laws already exist in twenty percent of the states and laws are currently pending in six others.
Synthetic THC products produced by Big (and small) Pharm only exist because the real thing is illegal. But the 'real thing' continues to outperform the synthetic. Just ask anyone who's taken Marinol. It will take years, perhaps decades before any truely effective cannabis drugs get FDA approval. In the meantime what we have is an effective 'folk medicine' that will be legally produced by designated growers in relatively small quantities. So imagine for a moment all the grow lites, plant nutrients, and hydroponic equipment that's going to be necessary for the legal production of high-grade medical marijuana. There are already several Vancouver-based companies producing nutrients and indoor grow cabinets on an industrial scale.
The business opportunity with medical marijuana will be in selling the tool sets, not the weed.

2009 Aug 30 08:12 PM

[Daniel Herkes]

And it will be legal. I do hope that it is an effective medicine.


On Aug 30 08:12 PM Ikiru wrote:
the legal production of high-grade medical marijuana.

2009 Aug 30 08:19 PM

[TinyTim]

Before everyone rushes off to Juarez and Tijuana to get high, the actual Mexican law change eliminates jail time for possession. You still get a record and have to go through "counseling". I believe after three strikes, you do end up in jail.

2009 Aug 30 08:31 PM

[jjp]

Perhaps because of all the drug violence in Mexico the real IPO to look for would be a chain of "rent-a-gun" locations for tourists. :)

2009 Aug 31 03:21 PM

[TBill]

Acutally, it's 3 strikes and you go to counseling. Whether that involves a rubber hose or not, I don't know.

TBill
***


On Aug 30 08:31 PM TinyTim wrote:

> Before everyone rushes off to Juarez and Tijuana to get high, the
> actual Mexican law change eliminates jail time for possession. You
> still get a record and have to go through "counseling". I believe
> after three strikes, you do end up in jail.

2009 Aug 31 04:41 PM

[grh1212]

Good for Mexico.

About 35 years ago i read a gut wrenching article in the Tulsa World about a 24 year old Texan who had already served 5 years of a 30 year sentence for smoking and possessing Marijuana. The article stressed that he had very little of it on him. I marveled that i lived in a nation so wealthy that it could afford to pretty much throw it's young men and women on the waste heap and accept moral responsibility for savaging the lives of people over trivia. Shame on America for this.

2009 Aug 31 05:18 PM

[User 422955]

AuGod! wrote: "Either a society is free or it isn't."

NONESENSE! One person's freedom is another's obligation. My wife and I hunt wild mushrooms.

If we go, without permission, on private property here, the landowner is within his/her rights to shoot us! Score: Landowner 1 freedom; mushroom hunters, no freedoms.

My wife is German and we visit Germany every year. In the woods there, the lines between private and public aren't marked. We can mushroom hunt in any wood. Score: Landowner, zero freedoms; mushroom hunters, 1 freedom.

2009 Aug 31 07:30 PM

[Tony Petroski]

There's something basically pathetic in speculating about the investment implications of Mexico's legalizing addicting and debilitating drugs. I thought we were nearing some kind of a bottom as a civilization, but now I'm not so sure.

The economics are clear: Lower the cost or the tax of something and the usage of that something will go up.

Legalizing "posession of small amounts" of these substances is perfect. That means that if you are a criminal cartel pushing drugs, your competitors are still excluded because distribution is illegal, but your customer base should expand because the "small amounts" are now legal. My guess is that this legalization signals the triumph of the drug cartels over the Mexican government.

If this is a good thing, why not go the whole hog and legalize distribution and posession of any quantities? Have some guts here you Mexican Cheech and Chongs.

2009 Sep 01 11:02 PM

[Daniel Herkes]

Amen.


On Sep 01 11:02 PM Tony Petroski wrote:

> There's something basically pathetic in speculating about the investment
> implications of Mexico's legalizing addicting and debilitating drugs.
> I thought we were nearing some kind of a bottom as a civilization,
> but now I'm not so sure.
>
> The economics are clear: Lower the cost or the tax of something
> and the usage of that something will go up.
>
> Legalizing "posession of small amounts" of these substances is perfect.
> That means that if you are a criminal cartel pushing drugs, your
> competitors are still excluded because distribution is illegal, but
> your customer base should expand because the "small amounts" are
> now legal. My guess is that this legalization signals the triumph
> of the drug cartels over the Mexican government.
>
> If this is a good thing, why not go the whole hog and legalize distribution
> and posession of any quantities? Have some guts here you Mexican
> Cheech and Chongs.

2009 Sep 03 08:58 PM

[Moochacha]

Since most of the drugs end up in the US and other rich (developed) countries, maybe this idea is worth thinking about. The drug cartels are making their money from smuggling, not from people in mexico. If they can reduce the power of the drug cartels in Mexico this country will be better off economically, reducing poverty and crime.

2009 Sep 04 08:17 PM

[grey road]

You geniuses miss the point of this entirely. This is obviously a pilot project for both the USA, Canada and the world. When crime is cut way down in Mexico because of this new law, other countries will follow suit. Anyone who doesnt see where all of this is leading(which is most everyone) is not looking at the big picture. Drugs are a fact of life. Marijuana is not a drug despite bible thumpers, idiots, ultra conservative republican honkeys and do gooders attempts to label it as a drug. go to church or a mall or wherever you people entertain yourselves and let people relax at there own choice so long as they are not harming you , it really is not your business. And Medical Marijuana Inc. (MJNA, OTC) continues to look like a good investment to me. I will continue to add shares.

2009 Sep 06 10:20 AM