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Smoke rising. As more states legalize marijuana, investing opportunity grows.

28 November 2016 in Trading Ideas

What you need to know

  • Increasing legalization by states poses unique opportunity for investors
  • Trump administration could go either way on enforcement
  • California legalization to prove major industry boon

Where there’s smoke, there’s usually fire.

The nation’s $5.7 billion marijuana industry, almost as large as the sugar-powered holiday, Halloween, is heating up after a string of legalization victories at the ballot box last week.[1][2] Voters in four states, including California, the nation’s most populous state, and the world’s sixth-largest economy, approved recreational marijuana. Another four states either removed or rolled back barriers to using pot for medicinal purposes. Analysts now expect the weed business to grow to a $50 billion industry within a decade, which is as “bigly” as the current Wall Street darling Big Data. [3][4] It’s high times for the herb.

Or is it? The surprise presidential victory of Donald Trump has cast some uncertainty into the equation. His nominee for Attorney General, or the nation’s “top cop,” Alabama Republican Jeff Sessions, can charitably be described as less than enthusiastic about marijuana.[6] Sessions has said, “…this drug is dangerous, you cannot play with it, it is not funny, it’s not something to laugh about… Good people don’t smoke marijuana.” [7][8] So far, investors are betting the political smoke will clear and Sessions – if confirmed by the senate – will states have their way.

Blue Chips, Green Rush

Microsoft (MFST) believes in the future of marijuana. The blue chip behemoth began selling software to government officials for tracking sales earlier this year. [9] Oracle (ORCL) also has a deal cooking to help the New York Department of Health monitor medical marijuana use. [10] But it’s not just Silicon Valley mainstays that are getting involved. A marijuana-focused private equity firm, Privateer Holdings, received attention last year when the Seattle-based company announced that its investors – in a $75 million round of fundraising – included PayPal co-founder and Facebook board member, Peter Thiel. [11] Even suburban gardeners want a piece of the action. Scotts Miracle-Gro (SMG), the Marysville, Ohio-based company better known for its contributions to your father’s lawn fixation than stoner culture, is joining the rush. The company will have invested more than $400 million in hydroponic equipment by the end of the year, and its chief executive is hoping Scotts will eventually develop branded pesticides designed for use on marijuana plants.[12]

Meanwhile, Big Pharma is testing a series of marijuana-based compounds that investors hope will be the next blockbuster drug. Arena Pharmaceuticals (ARNA), a San Diego-based biotech firm, is developing a cannabis-based painkiller known as APD371 that’s being billed as a possible alternative to painkilling opiates that have high rates of addiction and abuse. [13] Another big player, INSYS Therapeutics (INSY), is testing out a cannabis-based anti-nausea compound.[14] (Interestingly, INSYS donated $500,000 to opponents of an Arizona ballot initiative to legalize recreational marijuana. The Arizona-based company said the measure “fails to protect the safety of Arizona’s citizens, and particularly its children.” The initiative failed.) [15]

Golden State of Mind

Voters in two more large states — Ohio and Texas — may vote next year on marijuana legalization initiatives, as well. [16] But for now, most eyes are on California, which became the first state to approve medical marijuana in 1996. The state’s pot industry could grow to a $6.5 billion behemoth by 2020, according to ArcView Market Research, an Oakland, Calif.-based firm that monitors the legal marijuana market.[17]

While most attention is likely to be focused on companies that grow or use marijuana for new products, investors will also have plenty of opportunities to put their money into less-risky ancillary businesses, such as lighting, security real estate and social media that offer many of the benefits of a growth stock without the risks of a heavy investment into commodities or pharmaceutical development markets.

Investors should also remember that not all pot-related paranoia is groundless; consider Medbox. The West Hollywood, Calif.-based company was created to sell vending machine-like boxes to businesses where medical marijuana could be sold. Its stock, trading around $3 per share in early November 2012, skyrocketed to $205 on November 15 after an encouraging mention by Marketwatch. [18]

While the company issued a statement to dampen the enthusiasm, the stock only dropped to $20 per share. It remained in the double-digits for the next two years before sinking into near-oblivion. The company, renamed Notis Global Inc., said earlier this week that its stock has hit a 52-week high of 6 cents.

It’s currently trading at 0.03 cents per share.

Next steps to consider

Sources

[1] Halloween Industry Association, “Halloween Industry Stats & Trends,” 2016.
[2] Fuller, Thomas. “Californians Legalize Marijuana in Vote That Could Echo Nationally,” New York Times, November 9, 2016.
[3] Kaplan, Jennifer. “Cannabis Industry Expected to Be Worth $50 Billion by 2026,” Bloomberg, September 12, 2016.
[4] Furrier, John. “Big Data is Creating the Future – It’s a $50 Billion Market,” Forbes, February 29, 2012.
[5] Motif Investments. “Community Motifs: Marijuana,” November 18, 2016.
[6] Ingraham, Christopher. “What the future of marijuana legalization could look like under President Trump,” Washington Post, November 9, 2016.
[7] Lichtblau, Eric; Haberman, Maggie; and Parker, Ashley. “Donald Trump Selects Senator Jeff Sessions for Attorney General,” New York Times, November 18, 2016.
[8] Ingraham, Christopher. “Senators held a hearing to remind you that ‘good people don’t smoke marijuana’ (yes, really),” Washington Post, April 5, 2016.
[9] Javers, Eamon. “Microsoft scores its first-ever pot partnership,” CNBC, June 16, 2016.
[10] New York Department of Health, “Single Source Procurement: Medical Marijuana Program,” November 2015.
[11] Privateer Holdings, “Founders Fund Becomes First Institutional Investor in Legal Cannabis,” December 2014.
[12] Alexander, Dan. “Cannabis Capitalist: Scotts Miracle-Gro CEO Bets Big on Pot Growers,” Forbes, July 26, 2016.
[13] Arena Pharmaceuticals, “ADP371.”
[14] Campbell, Todd. “This Marijuana Stock Takes a Step Forward,” The Motley Fool, May 24, 2016.
[15] Fang, Lee. “Pharma Company Funding Anti-Pot Fight Worried About Losing Business, Filings Show,” The Intercept, September 12, 2016.
[16] Ballotpedia, “Marijuana on the ballot,” 2016.
[17] Arcview

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