After today's weak manufacturing report reflecting soft numbers in domestic factories, the DOW Jones took a 300 point hit. As domestic stocks continue to struggle, marijuana stocks conversely have continued to explode this year following the legalization of recreational marijuana in Colorado. The legalization of marijuana in Colorado has many investors wondering if marijuana is going to be a legitimate growth investment in the future.
With the growing national support towards legalizing marijuana it is hard to see how the marijuana market will not grow in the future as more states continue to push for legalization. According to a recent Gallup poll, 58% of Americans were in favor of legalizing marijuana. Currently twenty states currently have laws allowing for legalized medicinal marijuana, with a few states having legislation on the table. Out of the twenty states with pro-marijuana laws, nine don't yet have active retail markets. These factors have many analysts predicting strong growth over the next few years. A San Francisco cannabis industry group, ArcView Group, predicted that next year's marijuana industry revenue will be up 64% to $2.34 billion. Furthermore, MMJ Business Daily predicted that legal cannabis revenue will be between $4.5-$6 billion by 2018, up from $1.3-$1.5 in 2013. (WSJ - Entrepreneurs Seek Profits from Pot) With all this being said are the current marijuana investments available in the market prudent investments?
The answer to the question is undoubtedly no! Out of 35 public listings of marijuana companies available domestically the majority trade over-the-counter or on the pink sheets and are being pumped online by the stoner version of Jordan Belfort. According to Alan Brockstein, a self-proclaimed marijuana stock expert, "most of these stocks are not good investments." (The New York Post - Pot Stocks May Go Up in Smoke) Fueled by a high demand and no real supply, many of these marijuana "companies" are figments created by stock-promoters to fuel the rising marijuana demand in America. These marijuana stocks are mostly shell companies that through acquisitions have obtained "marijuana related" companies with little exposure to the actual medicinal drug.
For example, popular marijuana stock Terra Tech (OTCQX:TRTC) is trading up over 250% for the year. The majority of Terra Tech's revenue from its latest report came from its vegetable garden subsidiary, yet the stock more than doubled following the legalization of recreational marijuana in Colorado. Similarly, Growlife Inc. (OTCPK:PHOT) an owner and operator of 5 hydroponics retail stores is being valued with a market cap of $230 million, or $46 million per store. Despite these companies being vastly overpriced and in reality having limited exposure to legal marijuana revenue, the prices of their shares shot up exponentially as investors watched and read about recreational marijuana in Colorado.
As media coverage of Colorado ends and stock promotions run out, these marijuana penny stocks will inevitably fall and 2014 will go down as the year of the marijuana stock bubble. Despite many traders raking in money as a result of the bubble, long term investors will likely find disappointment when they see that their investments go bankrupt.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PHOT over the next 72 hours.