If Marijuana is Legalized, These Stocks May Elevate Your Portfolio
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The cannabis plant is the most commonly used illicit drug in the United States, with more than 17 million Americans estimated to use the "green stuff" every year. While it has many other names -- ganja, weed, herb, Mary Jane, bud, kush, and pot, to name a few -- both users and non-users can agree that it represents a lucrative market for producers and distributors. In fact, it is estimated that the marijuana business is a $100 billion industry, with medicinal revenues accounting for only a small fraction of this total.
Currently, 16 states and the District of Columbia have legalized the drug to be used for medicinal purposes, and two states – Colorado and Washington – are voting on its recreational legality this November. While most investors understand that a comprehensive legalization of marijuana would provide a boom to government tax revenues, it's likely that this would also give a boost to some tobacco and food companies. In a macroeconomic environment ravaged by stagnant growth and ongoing Eurozone fears, this may be just what the doctor ordered. It is important to remember that it does not matter what your take is on "to toke or not to toke," because a good investor always considers the opportunities on the economic horizon, so to speak. Below are a few publicly traded companies that may see their stocks pushed higher – no pun intended – if marijuana is made legal.
Altria Group (NYSE: MO) As the world’s largest cigarette and smokeless tobacco producer, Altria makes its profits by taking advantage of consumers’ vices. If marijuana were approved for recreational usage in Colorado or Washington this fall, MO and its peers like Phillip Morris (NYSE: PM), Lorillard (NYSE: LO) and Reynolds American would be in a prime position to capitalize on this new customer base. While many companies would have to develop methods to produce the drug, cigarette-makers already have the machinery and management teams; they’d only need to change the active ingredient from tobacco to marijuana and voila. Currently, PM is a decent stock to own no matter what happens with this situation, as it has provided investors with a healthy 8.2 percent return since the start of 2012. In addition, PM is currently trading at P/E and P/CF ratios below industry averages, even though earnings and cash flows grew last year.
British American Tobacco (NYSEMKT: BTI) This company is best known for its Phillies cigars and catalog of rolling papers, so it's understandable that BTI will benefit from legalization much in the same way as the U.S.-based tobacco companies mentioned above. Additionally, BTI has already been growing at an 8 percent clip since the recession, and it currently operates in 180 countries worldwide. With a nice dividend yield of 5.7 percent to boot, investors may be wise to investigate this stock further, as it's also generated a 17.6 percent return since last May. BTI sports solid 3-year revenue (8.3%) and EPS (8.4%) growth rates, and it is sitting on a nearly $4 billion mountain of cash. It seems that investors may be under-appreciative, as BTI is currently trading at a P/CF (13.0X) below the industry average (15.6X) and peers like MO, PM, LO, and RAI.
McDonald’s Corporation (NYSE: MCD) Okay, this is the most speculative play of the bunch but it has to be mentioned. Using basic economic rationale, marijuana legalization would lead to an aggregate increase in consumers with a case of ‘the munchies’. Thus, fast-food outlets like McDonald’s, Wendy’s, Jack In The Box,, and Sonic look like good bets. Likewise, Yum Brands, the owner of Pizza Hut, Taco Bell, and KFC, may also see an increase in enthusiastic patrons.
Even without a marijuana-induced revenue boost, MCD is still a good investment at the moment, as it is currently trading at P/E ratio (16.8X) below the industry average (20.7X), and its own 10-year historical average (19.4X). In fact, McDonald’s earnings have historically traded at a 14 percent premium above the S&P 500's average over the past decade. This year, shares of MCD are cheaper, trading at just a 9 percent premium. Driven by the restuarant's new 'extra value menu', McDonalds recently met the Street's earnings expectations with a first quarter EPS of $1.23 – a 7 percent jump from Q1 of 2011. Moreover, WealthLift’s Sentiment Index currently rates this stock as a strong buy, with an overall positive sentiment from 84.21 percent of investors.
This article is in no way an endorsement of marijuana for either recreational or medicinal usage. The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Jack in the Box, McDonald's, Philip Morris International, and Yum! Brands. 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.