Marijuana: The New Cash Crop?

In a move to unleash what could be upwards of a $120 billion dollar market, last Tuesday voters in Washington and Colorado voted to legalize marijuana — becoming the first states in U.S. history to do so for recreational use. Not to mention that the state of Massachusetts approved a measure for medicinal use, adding to the 17 states and District of Columbia that already allow it. “The world of voters spoke and we heard them,” said Colorado Gov. John Hickenlooper. “Obviously, the majority felt it should be treated more like alcohol,” he added.

If you want a glimpse of what legalized marijuana would look like countrywide, Denver, Colorado serves as the best example. The city alone has 204 dispensaries… roughly 3 times the number of Starbucks and McDonalds combined. Together, they service as many as 100,000 people. According to 60 Minutes producer Frank Devine, who worked with Steve Kroft on a recent report following the experiment to legalize, “We found that medical marijuana has become a normal and fairly noncontroversial part of Colorado life”. In fact, according to their research, it’s provided thousands of new jobs and much needed revenue for the state of Colorado, helping residents to pull out of the recession.

I should like to mention that while you may have strong opinions on the subject, our service remains politically agnostic. Our goal is always to follow the best investment opportunities for you by gauging where the wind blows. If you would like to submit comments, there will be an opportunity at the end of this article.

It will still be about a month before measures are officially on the books, and longer before state officials write the rules, tax codes and other regulations creating new state-licensed retail marijuana shops.

There is however, another and much larger catch to all this: the state’s legal dispensaries stand in violation of federal law. The federal government still classifies marijuana as a Schedule I drug under the Controlled Substance Act, and views it as more dangerous than cocaine and methamphetamine.

Of course, this flies in the face of the fact that the drug has been widely used to treat medical conditions including glaucoma, the effects of chemotherapy, chronic pain, and others. For years now, patients have arrived at dispensaries and showed a patient registry card and their driver’s license in order to gain access to marijuana centers, where everything is tracked and accounted for from seed to sale. Each plant has a barcode that is registered to a specific patient. There are dozens of strains, some proprietary like a microbrewery, engineered to have particular characteristics.

Yet all of this and every single transaction in between, despite the State of Colorado passing a constitutional amendment allowing it, is a Federal crime.

Their position is: “we can’t make you undue your statues but we can prosecute your citizens”. But curiously, that hasn’t been happening. Why?

To make a long story short, the federal government doesn’t have enough manpower. In Denver, it’s almost impossible to panel a jury, let alone get a conviction… and the voters don’t want it.

The justice department in Washington doesn’t appear to consider it a big enough issue. Deputy Attorney General James Cole has told U.S. attorney’s not to prosecute patients or caregivers in clear compliance with state medical marijuana laws. Their focus is keeping it away from children, organized crime, and using it as a pretext to do large scale interstate drug dealing.

So instead of overt action, the Feds is making it difficult for the new industry through banking regulations. If financial institutions do business with medical marijuana centers, they could be at risk for criminal or civil prosecution under the controlled substances act… or federal money laundering statutes. It’s nearly impossible, for example, for dispensary owners to get loans for expanding their business.

Many critics say that this state of limbo can’t last, and that an industry this big can’t be built on a criminal economy. With increasing acceptance and tolerance for the drug mounting with the younger generation, the pressure for reform seems to be building. Will the Feds cave in?

A lot of entrepreneurs are banking on it.

Christie Kelly was doing marketing in Washington when she decided to invest in a medical marijuana dispensary. “There are not a lot of opportunities in any one lifetime where you can be a part of something from such an early stage. And so, ultimately my partners begged me to come out and my husband and I packed up our bags, shut down our life in D.C. and moved out here”.

And she’s not alone. 60 Minutes interviewed the CEO of Dixie Elixirs and Edibles, the leading manufacture of cannabis laced edibles, and supplies most of the Colorado’s 537 dispensaries from a single factory. They sell ice creams, and medicated beverages… they even pioneered capsules with all medicinal benefits of marijuana, but without the “high”.

CEO Tripp Keber says, “So our plan is… for this business is ultimately to try to sell it. I truly believe that whether it’s big alcohol, big tobacco, or big pharma, a company like one of those is going to look very closely at medical cannabis… I think companies like Dixie are well positioned to be acquired as the industry develops”.

Dixie was recently acquired by the first publically held company vested in medical marijuana and hemp markets, Medical Marijuana Inc. (MJNA). The company is comprised of a diversified portfolio of products, services, technology and businesses solely focused on the cannabis and hemp industries. With a market cap of 56 million, it wouldn’t be difficult for an acquisition to happen.

MJNA is in my opinion highly speculative, but if you’re willing to risk it, it’s probably one of the best penny stocks to own in this industry.

Likewise, there’s also Cannabis Science, Inc. (CBIS), with a market cap of 43 million. Their initial focus was treating patients who have Cancer and HIV. According to Reuters, they’re “engaged in the creation of cannabis-based medicines, both with and without psychoactive properties, to treats disease and the symptoms of disease, as well as for general health maintenance”.

As I mentioned before, other industries are keeping a close eye on how this new “cash crop” develops…

“This is the dream tobacco companies have had since at least the 1970s,” says a 2010 Washington Post article, “when consultants issued a secret report to Brown & Williamson touting a future product line in marijuana.”

“The use of marijuana today by 13 million Americans is socially the equivalent of the use of alcohol by some 100 million Americans,” said the secret report, dredged up during the endless tobacco litigation of the 1990s. “The trend in liberalization of drug laws reflects the overall change in our value system,” it went on. “It also has important implications for the tobacco industry in terms of an alternative product line.”

And while the Marijuana industry is growing, Tobacco’s market has stagnated. Will the former save the later?

If it doesn’t, there could be another medicinal treatment that saves big tobacco… but it’s probably not what you think. In fact, Wall Street views this one company as a tobacco company… but our researchers show that it’s actually a biotech firm with a patent on a “miracle product” that doesn’t require a prescription. And the Fed’s certainly aren’t threatened by it.

Sincerely,
Josh Grasmick

Marijuana: The New Cash Crop? was originally featured in the Penny Sleuth.

This story was originally featured on Penny Sleuth.

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