On August 29, 2013, the U.S. Department of Justice issued a memorandum for all U.S. attorneys providing guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act ("CSA"). The memo surprised many marijuana advocates and investors as a dramatic shift in policy away from possession and distribution prosecutions and more towards reasonable objectives like preventing the sale of the drug to children and restricting interstate transportation of marijuana.
The legal arm of the U.S. also stated that it wouldn't challenge state laws that legalize marijuana, which removes a key concern for many marijuana-related stocks like GrowLife Inc. (OTCBB: PHOT), Medical Marijuana Inc. (OTCBB: MJNA), and HEMP Inc. (OTCBB: HEMP). Moreover, the move brings full legalization closer to a reality, which could open the market to cigarette companies like Altria Group Inc. (NYSE: MO) and Reynolds American Inc. (NYSE: RAI).
In this article, we'll take a look at the evolution of U.S. marijuana laws and what it could mean for several public companies operating within the industry.
Strong Support from the American People
Marijuana legalization has broad support from the American public, which could have a significant influence on lawmakers over the coming year or two. The Partnership at Drugfree.org - hardly supportive of legalization - found that 40% of U.S. adults that responded to its survey supported the legalization of marijuana. Notably, about 75% of respondents were parents of children aged 10 through 19 - a demographic that would be most opposed to the measures.
A separate study by Pew Research found that a majority of Americans now support legalized marijuana, with a national survey registering 52% in support and only 45% against legalization of marijuana. While it's not surprising that 65% of those aged 18 to 32 support legalization, about 50% of Baby Boomers support the stance compared to just 17% in 1990. With these demographics critical to politicians, there is ample justification for favorable lawmaking.
Finally, it's worth noting that 48% of Americans have tried marijuana, compared to just 38% a decade ago, showcasing the rise in its prominence. Of these figures, approximately 27% of those less than 30 years old have tried the drug in the past year, which is three times the percentage in any other age group. While 47% of respondents used marijuana for recreational purposes, approximately 30% used it for a medical issue, highlighting its effectiveness in that area.
Paving the Way Towards Normalization
Earlier this year, Uruguay became the first country in the world to fully legalize marijuana, setting a key precedent that could also speed up adoption in the U.S. Legislators in Montevideo voted 50 to 46 in favor of legalization, which aims to redirect law enforcement resources to fight street crime and smugglers involved in traffic more dangerous goods. Notably, the bill would regulate the entire chain of production, distribution and access to marijuana.
Under the legislation, home users would be allowed to grow up to six plants per household or 99 plants in a cooperative. Private companies would be permitted to grow marijuana, but would also be able to sell it to the government, which would market it in licensed pharmacies. The customers of these pharmacies would be limited to 40 grams per month and would be put on a federal registry in order to prevent sale to tourists looking to get a buzz on vacation.
These steps are important because they both normalize the legalization of marijuana and provide a key example for U.S. lawmakers to consider. With many lawmakers fearing that the substance wouldn't be able to be regulated effectively, Uruguay's programs could provide some reassurances and ideas of how various regulatory schemes work in practice. The efforts could also spark similar moves in other Latin American countries and around the world.
Profiting from These Legalization Efforts: Keep an Eye on the Marijuana Infrastructure Players
The Marijuana business represents an attractive opportunity for many public companies, ranging from marijuana-based micro- and small-cap stocks to large cigarette conglomerates. In the large-cap space, cigarette companies have reportedly already trademarked marijuana names and have viewed the market has highly desirable since at least 2009. Estimates from that report suggested that the market could be worth as much as $10 billion annually.
In the micro-cap space, there are several companies with marijuana-related business, ranging from GrowLife Inc.'s (OTCBB: PHOT) and its full range of commercial and home grower equipment to HEMP Inc.'s (OTCBB: HEMP) lifestyle products to MedBox Inc.'s (OTCBB: MDBX) automated dispensing machines. Many of these stocks have already experienced a significant rise in price following the news, including a 50% move higher by MJNA and a 100% move higher by HEMP.
Given the huge boost that the Department of Justice has given the industry, investors looking for a pure-play on the marijuana industry with strong fundamentals may want to take a closer look at GrowLife Inc. (OTCBB: PHOT). During the second quarter of 2013, the company reported revenue that jumped 460% to $872,000 due to its strategic acquisitions and product expansion. GrowLife's second quarter sales exceeded even MJNA's second quarter sales, and GrowLife appear to upward trending at much lower market cap of $25 million vs MJNA at almost $150 million market cap. We are particularly attentive to GrowLife because the "green light" provided by the Department of Justice is likely to encourage a lot more infrastructure building in the 20 states that already allow medical or recreational marijuana.
Playing the Trends for Investors
Traders and investors can approach the legalization of marijuana from two standpoints. First, the aforementioned news clearly increases the odds of legalization for both medical and recreational marijuana, which should reduce the risk premiums on many marijuana-focused stocks. In particular we think fully reporting equipment and consumables oriented stocks like GrowLife will benefit because all of the liberalization efforts on the state and federal levels point in the direction of vasts increases in the build out of the marijuana growing infrastructure. As a result, speculative investors can take positions in these companies in the hopes that legalization will give them an early-mover advantage in what could become a $10+ billion per year industry.
Second, conservative long-term investors may want to take a look at some larger tobacco companies that could benefit from legalization. Many of these stocks currently offer attractive dividend yields, but slowing growth prospects due to secular declines in cigarette smoking. The legalization of marijuana could boost these growth prospects and result in higher earnings multiples, share prices, and capital gains for these traditionally income stocks.
In summary, the legalization of marijuana is becoming increasingly likely on a federal level after it has gained so much traction on a state level. Investors looking to capitalize on these trends can either pursue speculative investments or stable long-term investors, which both offer their own set of pros and cons. But with a potential $10+ billion market opportunity, investors may want to build in some exposure to their portfolio sooner rather than later.
For a GrowLife Investor Presentation visit:
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http://grmarketresearch.com/phot/report.pdfAbout Emerging Growth LLC:
EGC is a marketing and consulting firm that specializes in creating ongoing communications strategies for public and private companies.
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