Legal Or Not, Medical Marijuana Loses

Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Medical Marijuana (OTC: MJNA.PK) is the hot penny stock the moment but it is just a passing fad? In this article we show that even if the stars align as the bulls hope for with continued legalization of marijuana, the story may not end so positively for investors in this speculative marijuana play. If Marijuana were legalized the big tobacco companies could swoop in and easily take over this new market.  We will also break down the numbers (which, unfortunately, are not always available) and determine if this high flying penny stock is set to soar or is it the next Icarus ready to plunge.

 

Medical Marijuana Doom

All the hype stems from the various states that have begun proposing the legalization of Marijuana. Bulls believe that this is a multibillion dollar market and that even a small fraction of this market could mean very real, sustained growth for this early player. Let's just assume for a moment that the federal government legalizes Marijuana. The most obvious problem here is that there are no real barriers to entry besides that of legality. That is, if/once it is legal, the products will quickly commoditize as the tobacco companies like Philip Morris (NYSE: PM), Reynolds American (NYSE: RAI), Altria Group (NYSE: MO), and Universal Corporation (NYSE: UVV) enter the fray.

The picture looks bleak in this scenario for Medical Marijuana because in a commodity market, those that can produce in volume and have the appropriate distribution scale will swiftly corner the market and either acquire the smaller players (unlikely since there is very little IP of value here) or simply put them into bankruptcy. A few potential competitors:

 

The smaller players would see margins squeezed, sales throttled, and the company itself would very quickly end up bankrupt. Of course, given the somewhat shareholder-unfriendly nature of the management (which seems to be diluting shares at an alarming rate), management would likely walk away quite rich, leaving retail investors (and any institutions with enough bravado to touch the stock) with a worthless security.

The Numbers

The first thing that leaps out is the market cap. Currently the company is valued at over $275M on the market. Typically companies that have track records of profits and growing revenues are rewarded with larger market caps, and micro-cap startups that still trade on the pink-sheets are met with a "show me" attitude by the Street. The company has issued over 808M shares, and has been sustaining operations and "generating cash" by way of dilution.

Medical Marijuana's earnings multiple sits at 85, which is high to the point of being in the nose bleed seats. Granted, the company posts very nice gross margin numbers and is actually making a small profit, which is rare for a penny stock. Yet these do not compensate for the high price per share.

Price Is Relative

Ask the average Joe on the street whether Google at $793 per share or Medical Marijuana at .34 cents is "cheaper", and the answer will almost certainly be that MJNA is clearly cheaper. Yet MJNA is actually a heck of a lot more expensive. Google's P/E (a legitimate growth business) is 24.6 while MJNA is 85.

Conclusion

Medical Marijuana is clearly overvalued given its growth prospects and market cap. If legalization does occur the major tobacco companies or other various corporations with much deeper pockets will move into this sector. The barriers to entry are just too low to prevent competition from attacking from every angle. This stock is a screaming sell.


I do not own stock in any of the companies listed nor am i advocating drug use in -any- way.  This is simply an article on a speculative stock which is overvalued.

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