Marijuana: A New Investment Opportunity

by: Harold Goldmeier


Legalized sales of marijuana are growing fast with approval of and oversight from government.

It is a growth industry around the world in a nascent stage yielding huge tax windfalls to local governments.

Investors can enter the market choosing from start-up companies, penny stocks, a few more established companies, or more likely safer venture capital investments.

Editor’s Note: This article covers stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Looking for a new investment opportunity that gets you in early? Do your criteria for investment prioritize social responsiveness and sustainability? Are you concerned for a relatively safe investment ensured by government regulation, a fast growth industry with high demand, and exceptionally good profit margins? Check out investing in legalized marijuana.

The illegal global drug trade tops $300b annually. It is a growth industry. It includes addictive drugs, misuse of prescription drugs, and recreational drugs. Marijuana enjoys growing acceptability for recreational and medical purposes. My children and students tell me if I give them $10 they will return in fifteen minutes with street marijuana despite it being illegal almost everywhere in the world. Market distribution of marijuana satisfies demand more comprehensively than most soft drink brand names.

The Netherlands decriminalized possession of marijuana many years ago. There are even coffeeshops (one word in Dutch) for the sale and use for personal consumption. One must go outdoors to smoke a cigarette or be a minimum age to drink alcohol in a cafe, but smoking marijuana is a coffeeshop experience. Other governments are decriminalizing its possession with increasing social acceptability. Adding traction to marijuana legalization are the budget breaking costs of prison incarceration and expected reduction in street crime, costing taxpayers lots of money and anguish.

High demand plus commercial/industrial opportunities for the product add to the attraction of marijuana investment. Marijuana and hemp come from the same plant and are grown all over the world. The stalk and seeds are used "for textiles, foods, papers, body care products, detergents, plastics, and building materials," according to Hempethics Weekly. Marijuana is produced from the cannabis flowers. "Hemp fiber (sic) is the longest, strongest, and most durable of all natural fibers. Hemp cultivation requires no chemicals, pesticides or herbicides," and it can be rotated in with other crops like corn and legumes as a sustainable crop.

2014 is a watershed year for legalization. Laws are catching up to reality. Uruguay's President is nominated for the Nobel Peace Prize for being the first nation, this past February, legalizing the growing, sale and smoking of marijuana claiming it "a tool for peace and understanding."

Legalization was a serious topic at the Republican US Presidential debates most impressively raised by candidate Paul. He asked everyone in the audience to raise a hand if they will become addicts if the government legalizes drugs for personal use. To a roar of laughter no one raised a hand, but they are Republicans. PEW Research reports nearly three-quarters of liberals and half of the politically conservative favor legalization. Moshe Feiglin, a conservative Israel Knesset member, advocates for its legalization where dispensing of medical marijuana grew 13% in 2013.

Legalization faces greatest opposition from the alcohol and pharmaceutical lobbies protecting their market shares. They are tilting at windmills. Political, social and medical demand whirls past opposition.

Investors can apply for a state license to grow, process, and sell medical marijuana in Massachusetts and 20 other states. 200 applicants vied in 2014 for 20 businesses despite a $50,000 license renewal fee and $500 to register each employee. Applicants must submit a business plan, and comply with local ordinances for security, architectural review, growing standards, zoning law compliance.

Washington State issues three separate licenses for producers, processors, and retailers, preventing vertical integration by investors preventing monopolies. Over 7,000 applied. Washington anticipates earnings of $2b in five years from a 25% tax applied at each level. Officials expect savings on incarceration, crime reduction, cutting treatment services, legal aid, and probation supervision.

Eighteen retail marijuana Colorado businesses, open since January 1, 2014, paid as much as $3m in taxes in the first 30 days of business. Gross sales might reach $600m annually, and Governor Hickenlooper expects tax revenues reaching $134m a year for the state coffers. CBS News reports not surprisingly the attitude from townsfolk in Garden City, Co., is "One's decision to smoke marijuana or not is a very personal decision." Garden City realized $250,000 in taxes from sales last year "giving Garden City new highs, high employment, high tax revenue, and, as (the Mayor) reported, high hopes for even better times ahead."

Investors wanting hands free involvement can invest in venture funds managed by business suits with education and work credentials. They bring gravitas and legitimacy to this emerging market. Privateer Holdings (PH) brings private equity to "this remarkably promising marketplace" navigating to bountiful returns through strategic acquisitions and investments. PH boasts strategic and management experience in investing, managing companies, and in the cannabis industry. Former ten-year veteran of the US Drug Enforcement Administration, Patrick Moen, joined PH last November as managing director of compliance and senior counsel. Another former DEA agent retired, and works as a consultant in Oregon to medical marijuana businesses. Reuters reports the US Department of Justice announced last August, "it wouldn't interfere with state efforts to regulate and tax marijuana provided they're able to meet a set of requirements that include keeping it away from children and restricting its flow into other states."

Medbox (MDBX) is regularly covered by the major news services with a stock price over $30 per share and a market cap over $444m. Most other companies in the field like Cannabis Science (OTCPK:CBIS) with a market cap of $129m are below $1 with low trading volume. So too are Medical Marijuana (OTCPK:MJNA) and GreenGro Technologies (OTCPK:GRNH). AVT, Inc. (AVTC) is nearly $4.50 with no listed market cap.

These are very risky investments. Risk transparency is the watchword for investing in this new industry. Safer bets might be in venture funds like Ghost Group and ArcView Group for investing in the industry. Seeking Alpha reported in February 2014: "It's worthwhile analyzing the marijuana stock market, including the recent run-up in share prices." A strong buy recommendation was issued for Growlife, Inc. (OTCQB:PHOT) as "the best short-term and long-term investment of the 25 current publicly traded marijuana stocks."

The bottom line for investors is the demand for legalized marijuana is strong. The industry will continue to grow as the movement spreads. The pace at which it grows depends on local demand to dulcify opposition in state legislatures and the need for new tax bases. A more conservative Federal Congress and White House elected to office in upcoming elections might slow the pace of growth, but will hardly stop the freight train. Investor risk is in determining the best management for growth of companies servicing the demand through rigorous evaluation, and where management is committed to ubiquitous risk transparency.

Shel Silverstein's bat "Screamed in fright, Turn on the dark, I'm afraid of the light." The lights are burning bright on this pragmatic crusade. It no longer stumbles around society's fringes or in political wastelands.

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.