The Dude Abides
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since Washington State has legalized marijuana for recreational use and 17 other states and the District of Columbia for medical use several stocks have had wild mood swings like MedBox (NASDAQOTH: MDBX), a company that makes medical vending machines. While most news reports about marijuana legalization are either sniggering or sanctimonious, Alan St. Pierre, executive director of NORML (National Organization for the Reform of Marijuana Laws) made a sane economic bull case on CNBC on December 7 for continuing legalization efforts on the federal level.
He reported 100,000 people are in US jails for marijuana offenses at a cost to taxpayers of $60,000 per inmate per year. Including enforcement and incarceration costs he estimates it costs US taxpayers over $10 billion per year to pursue marijuana crimes. He also mentioned the Washington State budget office estimates that state revenues from taxes and fees on legalized marijuana should jump to $532 million by 2015. When state treasurers start seeing the kind of numbers coming out of Washington State more states are likely to join the bandwagon.
High On MedBox
Just a few short months ago playing the legalized marijuana stocks would be met with snorts of derision as images of potheads like The Dude of “The Big Lebowski” prevail among the general public. Now, the medical marijuana stocks are beginning to be taken seriously as MedBox soared to $215 per share from a low of three cents in 52 weeks.
Normally, I wouldn't write about OTC stocks, especially one that's as opaque as MedBox with no EPS, no price target, no real metrics except a price to book value of 14,000. MedBox closed on December 7 at $29.65 then closed at $95.00 on December 13, for yet another 35.71% rise on the day and a three bagger in four trading days. The company has gone from a penny stock to a mid-cap in months.
Two other marijuana-related stocks are Converted Organics, a penny stock. It's involved in industrial wastewater treatment, vertical farming, and organic fertilizer and is considered an agricultural chemical supplier. It has 10 employees. By no means am I recommending this; I am only mentioning it.
Then there's GreenGro Technologies purveyor of vertical cultivation technology, (i.e. pot cultivation mostly) also a penny stock which closed at a nickel on December 7. Once again, there are almost no numbers to report on performance or profitability. The company has total cash of $3,540 to debt of $171,540. Once again understand I only mention this name, I am not recommending it.
Bull vs Bear
The bull case is that the areas which aren't illegal on a federal level, that is ancillary to the sale of the actual commodity, are highly profitable or have the potential to be. Bulls also note growing sentiment toward legalization of medical marijuana and progress made on changing the pothead image of medical marijuana users and more understanding of the stigma pain sufferers endure for using medical marijuana.
The bear case is that the entire sector will be tied up in the courts for years as the issue of legal marijuana goes round and round on the federal vs. state level. Another caution is that these are really penny stocks with all the dangers inherent in trading them.
Alternatives To Speculation
These names listed above are decidedly speculative, no better than lottery tickets really but there has been speculation that tobacco companies might get into the marijuana business with an infrastructure already in place for marijuana cigarettes. Tobacco companies have categorically denied any interest in selling marijuana. But if they did the big player domestically would be Altria Group (NYSE: MO) with a 17.44 P/E and a 5.30% yield with a 92% payout ratio.
That said, Altria is a much finer and more stable investment than pure play marijuana stocks despite headwinds from smoking crackdowns all over the country as well as taxes on tobacco products being a cash cow for state governments.
Altria also sells smokeless products and wine so it has some cushion against these headwinds. Altria has a long history of raising its dividend. In 2010 it raised it twice. Their profit margin is 22%. Caveats are that growth is slowing and government regulation and legal events are always risks in tobacco names.
Fellow fool Reuben Gregg Brewer has speculated that Big Pharma like Pfizer could get into the act, but that is a very unlikely scenario as he points out. Frankly, Pfizer (NYSE: PFE) doesn't need the aggravation although it could use a new drug like in the Huey Lewis song. Pfizer without pot still has a 3.40% yield and a 19.84 P/E. I liked it before for my "Sex, Drugs and Rock N Roll portfolio".
If you want another alternative to pot stocks you might consider a play on the "munchies" with PepsiCo (NYSE: PEP) which sells the sodas and the" itos" (Doritos, Cheetos, Fritos, and Tostitos) that go hand in hand with marijuana consumption. Pepsi has an 18.74 P/E and a 3.10% yield.
Pepsi has a lot more in its product portfolio than just junk food, it also carries healthy options: waters, oatmeal products, cereals and Tropicana juices. Corporate governance risks are low and junk food regulation like the NYC ban on supersize drinks is less of a headwind for Pepsi than tobacco regulation and taxes are for a tobacco company.
The Final Toke-Away
Yes, you could have made a lot of money with MedBox and maybe you still can but it is total speculation and the other two are even less promising as the dispute between federal and state law on marijuana will continue to be "hash"ed out in the courts for years. Any speculation that the tobacco companies will cross over into the marijuana industry is just smoke. Pepsi, Pfizer, and Altria will forge on with good yields and growth and still be worth buying with or without legalized marijuana.
That said, I leave you with my favorite Dude quote, "Fortunately, I'm adhering to a pretty strict, uh, drug, uh, regimen to keep my mind, you know, uh, limber." Well said, Dude.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!