Tobacco Set To Profit From Emerging Legal Marijuana Trade

Feb. 15, 2013 10:01 AM ETMO, VGR, RAI
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Last fall Washington State and Colorado became the first states in the union to legalize the recreational use of marijuana. Both states are now tasked with the job of figuring out just how they are going to sell the drug over the counter. Concerns are wide reaching. Officials are debating on how the product is to be grown, tested and labeled, as well as what regulations will apply. Adults over 21 will be able to walk into certain stores in both states and purchase up to an ounce of heavily taxed weed. Sales are slated to begin in Washington at the end of the year. Clearly the nation is watching closely to see what type of model these states put in place to ensure everything associated with the new venture is structured properly and safe for potential users. It's unclear as of now whether medical marijuana growers will be tapped as vendors but it seems likely. Over 18 states condone the use of marijuana for illnesses such as cancer and HIV/AIDS and the number of states that will pass recreational use of the drug is expected to grow by at least 11 this year.

The medical marijuana business was worth an estimated $1.7 billion dollars last year and accounted for thousands of jobs. The segment is growing fast and a host of businesses benefit from trade in medical marijuana. Experts advise that now is a good time to jump on the marijuana train as it is just leaving the station. Speculation is that the drug could become federally sanctioned within the next five years. Speculation also says that the battle on who will bring marijuana to the market will be between tobacco companies and pharmaceuticals. The betting is that tobacco companies will have the edge, in which case there will be plenty of them lining up to get in on what is projected to be a combined $40 billion per year business.

Definitely look to small-cap tobacco companies such as Vector Group (NYSE: VGR) to hop on the train as well as larger companies like Altria Group Inc. (NYSE: MO) and Reynolds American (NYSE: RAI). Vector is a solid performer which consistently turns a profit. It also pays double digit dividends to its shareholders. The company offers 118 combinations of cigarettes branded under the Pyramid, Grand Prix and Eve names. VGR has a $1.3 billion market cap and shares are trading at $15.87.

The bottom line is marijuana is soon to become big business. Look to tobacco companies to market what will be another highly taxed legal vice. Interesting times we live in.

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