Marijuana 100% Legal Soon?

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

If you have been watching the news you may have heard that Washington and Colorado have become the first states to legalize recreational marijuana.  Washington State believes legalizing and taxing marijuana could bring the state almost $2 billion in taxes over the next five years.  Colorado feels it would generate 100 million annually in tax revenue for their state.

Polls have shown that the majority of Americans support the legalization of marijuana.  There is support for legal recreational use of marijuana and it seems to grow each year (no pun intended).  I believe it is just a matter of time until all states vote to fully legalize it and tax it.  It will be regulated the same as alcohol is. 

Other benefits to debt ridden states are reduction of burden on the courts and jails.   There are estimates that states who legalize marijuana could see savings of hundreds of millions in law enforcement and jails.  New jobs would be created.  Money would be saved reducing the efforts required to battle marijuana in the drug war.  These savings are both on the federal and state levels.  The federal government would save an estimated $13.7 billion annually if pot were legalized according to recent reports.  This is big business folks.

Once marijuana is legalized for recreational use I think we may likely see the leading tobacco companies come in to produce and distribute marijuana.  They have deep pockets, expertise in growing a similar plant (tobacco), factories to package the product, and the distribution channels to get it into stores.  The small growers would be completely taken out by these juggernauts.

Domestically, the companies to look for that can and will take advantage of this are Altria (NYSE: MO), Lorillard (NYSE: LO) and Reynolds American (NYSE: RAI)

I believe right now you can invest in these companies strictly on the basis of their tobacco businesses.  You’ll receive a great dividend that historically has been very safe.  Recently this sector has performed very well as investors chase yield. These are well managed companies that continue to perform in low to no growth environments.  They find ways to thrive through cost cutting and price hikes.

Looking further, I see the legalization of marijuana as one giant call option on this development.  When, not if, it happens, the marijuana industry will be measured in the billions and billions of dollars.  These domestic tobacco companies are all in the best position to jump all over this when legalization sweeps into other states.  The upside to revenues and earnings for these firms will be substantial as an entirely new revenue stream gets switched on. 

When will all this happen?  I don't know exactly, but with Colorado and Washington leading the way it can't be too far off now.  It will put pressure on the federal government to visit this issue and consider legalizing marijuana on the federal level.  It could be a year, maybe a few years or a decade but I'd estimate a 90% chance it will happen within ten years. 

A great Fool article by Alex Planes was published recently comparing Altria versus Lorillard based on various metrics.  I won't reiterate them here but if you are looking to research these companies it is worth a read so I've included the link below.

I personally am not a drinker or smoker of any kind but I fully respect anyone's right who enjoys these things.  I know the purchase of "sin" stocks is sometimes looked down upon, but Jim Cramer has a good take on this.  The money is the same in your bank account.  It does not know if it came from tobacco or some other less sinful product.   He says if you are against tobacco then take your profits and invest them in anti-tobacco campaigns.  

I invest to make money and generally believe adults can make their own choices of what to eat, smoke, drink, or invest in.  So if you like the flavor of these sin stocks and want in on a potentially huge catalyst that could supercharge returns take a look at these domestic tobacco plays.  Once the tide changes regarding legal recreational use for marijuana and one or more of these big three domestic tobacco companies comes in to compete, the prices will no longer be so cheap as the market quickly will price it in.


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EquityBull owns shares of Altria Group and Lorillard. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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