5 Stocks Affected By The Legalization Of Recreational Marijuana

by: The Specialist

Seeking Alpha author Individual Investment Strategist wrote a fascinating, well written article entitled DOJ Guidance Paves Way For Marijuana Stocks which gives a detailed play-by-play on what's happening with recreational marijuana. There's only one problem with the whole marijuana investment thesis; apart from the often sky-high valuations, poor balance sheets, and a flood of competition that legalization would create. Recreational legalization means would kill the exclusive nature "pot pharmacies" enjoy. If an investor insists on playing pot stocks on speculation of the legalization of recreational marijuana coming to pass, that investor should at least invest in those stocks that will actually benefit from recreational legalization rather than get hurt by it. Many articles have been written about the horrendous fundamentals of certain marijuana stocks such as this excellent article here, but the purpose of this article is to help investors (or shorts) to understand which ones should even be on their radar.

Below is a list of five of the most popular marijuana stocks, their business models, and how successful recreational legalization might affect them.

1. Medical Marijuana, Inc. (OTCPK:MJNA)

"It's about getting healthy, not high," said Chris Boucher, Vice President of Product Development for HempMedsPX.

HempMedsPX is a subsidiary of Medical Marijuana, Inc. As the name implies, the focus of MJNA is on marijuana for medicinal or other health-related purposes. The legislation some MJNA shareholders are excited about is all about marijuana for getting high, not healthy, the polar opposite of the MJNA business model. If recreational marijuana becomes legal and widespread as alcohol, there's no reason to pay a premium for it for medicinal purposes. It would be like selling medicinal wine out of a special "wellness clinic" for health purposes. What would be the point? If I want to buy some wine for its antioxidant benefits I can pick some up at the local supermarket.

MJNA owns a number of other businesses such as CanChew Biotechnologies, KannaLife Sciences, Canipa Holdings, Wellness Managed Services, and Red Dice Holdings. The problem with all these is simple: it's all about the medical use of marijuana. From MJNA's website:

Every day, thousands of people around the world enjoy the benefits of products from the Medical Marijuana Inc. family of companies.

Your family's health and well-being is our passion. That's why our companies offer the world's broadest range of health and wellness products and technology in the medical and industrial hemp industries.

We are actively involved in the capitalization, development and acquisition of hemp and medicinal hemp based consumer products as well as the supporting technologies.

I'm not saying it's impossible for this company to possibly do well regardless of recreational legislation, but I have trouble believing it would be a positive. MJNA is clearly not a pure play on recreational marijuana.

2. Hemp, Inc. (OTCPK:HEMP)

Allow me to jump right to it. From a HEMP press release:

Hemp, Inc. (HEMP), a leader in the industrial hemp industry and the first industrial hemp publicly traded company, feels it is necessary to inform and educate shareholders, and others who may be misinformed, on the difference between Industrial Hemp and marijuana. It is important to note that Industrial Hemp products are completely legal for consumers to purchase in the United States. Marijuana, while medically legal in many states and recreationally legal in Colorado and Washington, is deemed illegal on the Federal level, and consumers in States that do not recognize medical marijuana may face prosecution for purchasing or possessing marijuana. To clarify, the Hemp products such as Hemp Milk, Hemp Cereal, and Hemp Oil that American consumers nationwide are increasingly purchasing every day, are obviously, legal.

Need I say more? HEMP felt it is "necessary" to let everybody know that its products are the legal version of marijuana. So how would further legalization of the illegal version of marijuana help HEMP? The answer is simple. It wouldn't. If O'Doul's non-alcoholic beer were around during Prohibition, I imagine it would have sold well until Prohibition ended. Then its sales would have plummeted. Selling a fake marijuana product in a real and legal marijuana world I can't imagine would do very well.

3. Tranzbyte Corporation (OTCPK:ERBB)

Tranzbyte owns a subsidiary called Altitude Organic Corporation. It describes itself as:

The first publicly traded medical marijuana dispensary brand in the world. Beginning in 2009, the company has developed retailing, branding, and commercial cultivating strategies in conjunction with its licensed medical marijuana retail dispensaries operating under the Altitude Organic Medicine brand name.

Once again: all about medical marijuana and not recreation. Next.

4. Cannabis Science, Inc. (OTCPK:CBIS)

Cannabis Science is one of the most popular marijuana stocks. Don't let the name fool you, however. CBIS is mostly just involved in the research aspect of marijuana to potential treat all sorts of ailments. It describes itself below:

Cannabis Science, Inc. is at the forefront of cannabinoid research for the development of cannabis-based medicines to satisfy unmet medical needs. The Company works with leading experts in drug development, medicinal characterization, and clinical research to develop, produce, and commercialize phytocannabinoid-based pharmaceutical products.

Worse, all of their research is still in pre-clinical investigation anyway and not even in Phase 1 trials. Recreational legalization isn't going to help them get through the various phases to FDA approval any faster.

5. Growlife (OTCPK:PHOT)

This is the only pure play on this list for recreational marijuana use. Growlife is a "picks and shovels" type of company of the marijuana gold rush. It offers LED lights for indoor growing; wireless monitoring and control equipment to operate grow room functions; and plant growing systems and accessories, including nutrients, media, timers, controls, and automated water accessories. In addition, it sells hydroponic equipment online. The more legalization of any kind the better for Growlife. Not surprisingly, Growlife experienced record revenue following the recent DOJ announcement:

We have experienced record revenue following the long overdue DOJ announcement," stated Rob Hunt, President, Growlife Hydroponics. "Both in total revenue and transactional volume, Greners.com is seeing a dramatic increase in sales including the largest dollar volume sales day in our history. Most importantly, we are seeing a substantial rise in new customer registration which for us is a very important metric."

While I own none of the names above, if I were looking to invest in a pure recreational medical marijuana play, Growlife would be it. I intend to watch and see how its numbers as they are reported, how the industry itself develops, and how the legal environment evolves. I could end up taking a position in PHOT at any time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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