Legalize It: An Investor's Perspective

 

Legalize It: An Investor's Perspective

     Currently, marijuana has been legalized for medical usage in 19 states, and is fully legal in 4 states (in addition to the District of Columbia). This leaves 27 states where it remains illegal

"Buddy" the Marijuana Mascot from Ohio

or decriminalized (an offense punishable with a fine rather than jail time). However, it remains federally illegal and is classified as a schedule 1 drug, meaning it is "defined as a drug with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence."
     Marijuana's illegality is its largest barrier into being a good long term investment. Because of this, many serious investors (especially banks) choose to avoid exposure to the legal risks, and will not put money into its development. Banks are largely federally regulated, and many will not take-in or loan money to be used in the production or purchase of marijuana or its by-products. Recently, The Federal Reserve even rejected the establishment of a Credit Union in Colorado that was to deal primarily in the money from the sale of marijuana.

     This presents the industry with a three-fold problem: First, it stifles the growth of newly created companies. Second, it creates a barrier for large existing companies from entering the industry. Lastly, the young age of the industry hasn't allowed regulation to refine itself yet in order to create growing and profitable industries.

     Many states are still attempting to legalize marijuana for recreational and medical usage. However, due to improper regulation, the industries have either been stifled or have unprofitable environments for the growers and/or retailers. Ohio couldn't pass a legalization

Colorado Growing Warehouse 

bill because voters did not agree with the monopoly it created, which would also have prevented its widespread growth. Colorado is proposing measures to reduce production because they are afraid the marijuana will cross over into states where it is still illegal. Washington state has created an unprofitable environment by allowing for too much expansion in growing while overtaxing on the retail end.
     While the whole industry is waiting for it to be legalized, they may ultimately be crushed by large companies like Altria (NYSE: MO) and R.J. Reynolds (NYSE: RAI) (aka “big tobacco”), even though these companies have publicly said that they are not currently interested in entering the marijuana market. For a major industry that is already very good at growing, sourcing, refining, and selling a weed, actually getting into the "weed" business makes sense. Especially since it will be hard to maintain their status as “the best industry to invest in” with cigarette usage nearing lows not seen since the early 1900's.

     It is clear that until marijuana is legalized nationally, and the regulation governing it has matured, it won't make a good long-term investment. Stay away from the the stocks that

Washington Marijuana Retail Store

deal with marijuana most are unprofitable and volatile. I would even go as far as saying that you shouldn't take a position until a large company like Altria or R.J. Reynolds decides to get into the recreational market and maybe even big pharma like Johnson and Johnson (NYSE: JNJ) or Pfizer (NYSE: PFE) for the medical market.
     National legalization may not be that far off, though. Eleven states are very close to legalizing it, and if all bills pass, that would bring the total to 16. With the inconsequential attention it has gotten in the Presidential election so far, the outlook may be positive no matter which party gets elected. I would keep an eye out and start following news feeds for large Tobacco and Pharmaceutical companies to monitor their interest in the industry, and follow their lead on when to jump in.