Marijuana Stocks: How to Legally Invest in the Ultimate Cash Crop

Jeff Chiu, AP
The medical marijuana movement is the strongest it's ever been, with successful decriminalization in several states and strong progress in dozens of others.

With these changes has come greater public awareness of just how huge the medical marijuana business really is. In fact, it's so big that if the crop were grouped with other big-time agribusinesses, it would easily be the most valuable cash crop in the country -- worth more than corn and wheat combined.

With the cultivation and ongoing decriminalization of pot come new -- and legal! -- ways to invest in the trend.

But before you try to cash in on the ultimate cash crop, there are a few things you need to know.

Growing like a Weed

Over the past few decades (think back to the Reagan anti-drug days), cannabis has come out of the basement and all the way into the Oval Office. As the country has gained substantial momentum on other social issues, such as gay marriage, there is an enormous force behind legitimizing marijuana once and for all.

Supporters include an increasing number of politicians, such as Rep. Dana Rohrabacher (R-Calif.), who is pressing Washington to stay away from states' individual marijuana policies.

A cannabis leaf graced the cover of a recent edition of Barron's, a leading, historically conservative financial magazine, which argued in favor of legalization of marijuana, stating that "Legalizing marijuana will hurt drug lords, help cash-strapped states, and ease burdens on police and prisons."

Such arguments in favor of legalization aren't new -- many have touted these arguments for decades -- but what's important is that legalization has become a bipartisan issue. Our country is fighting a war that seemingly nobody except the alcohol and tobacco lobbies (and Michael Bloomberg) believes in.

On a macro level, this would suggest that the business of marijuana is on the brink of a full-scale breakout. So, what's an opportunistic cannabis investor to do?

Your Guide to Pot Players

Before determining whether you should invest or not, let's identify the available publicly traded players.

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For what's called a "pure play," there are the companies that actually make cannabinoid products, including Cannabis Science (CBIS), and Medical Marijuana (MJNA). The former is an early-stage company that uses cannabinoids for pharmaceuticals that treat autism, cancer, HIV, and other illnesses. Medical Marijuana makes cannabinoid-based products as well, in addition to servicing the industrial hemp market (an industry that goes well beyond marijuana and pharmaceutical purposes).

These stocks, both microcaps, have had periods of strong gains. But with those gains comes extreme volatility.

If you're looking for a more established, big player in the industry, you'll find it in Medbox (MDBX). Its $400 million market cap makes it the largest company in this space. Medbox does not cultivate or sell cannabis, but it builds the machines that dispensaries use to store the drug. The automated vending machines are specifically designed for "sensitive" drugs, keeping the drugs in tight control and sanitized up until delivery to the patient. They can either be used to diffuse medicine directly to a walk-up patient (with biometric ID), or in assisted living facilities, pharmacies, and other points of distribution.

Besides being the largest player by market cap, Medbox is also one of the few market darlings.
When recently recommended the company for investors looking for a pot play, the stock shot up nearly 400 percent almost instantly.

Please Read the Warning Label Before You Inhale

Regardless of the new momentum behind decriminalization (and in some places, recreational legalization) and the equity options available to investors, it's important to recognize that pot stocks are still highly speculative.

Let's start with Medbox's meteoric rise after the MarketWatch mention.

While the run-up might make pot-related stocks even more tempting to investors, what it actually illustrates is the volatility that plagues them. Even Medbox's CEO addressed the outrageous price spike, saying that the economics of his business had not materially changed from one moment to the next. Since Medbox's rocket to more than $200 per share, the stock has settled back down to around the $26 mark.

As for Cannabis Science and Medical Marijuana, both businesses are valued under $150 million (we're talking "penny stock" territory), making their stocks particularly susceptible to market-manipulating hype.

Medical Marijuana has, in the past 12 months, traded anywhere from 2 cents per share to 50 cents If you were to have bought the stock at the beginning of the year, your position would have gained 40 percent in value. But if you had added shares to your portfolio in the last three months, you'd be down 50 percent. Similarly, Cannabis Science is down nearly 30 percent year to date.

Another check mark in the "speculation" category is that there is still strong resistance to letting these companies integrate into the mainstream business world.

President Obama originally campaigned on more progressive laws regarding the drug. But he's adopted a more conservative stance on marijuana businesses. He reappointed Michele Leonhart as head of the DEA, who has used tactics that go as far as threatening criminal prosecution of state employees for implementing dispensary regulations. According to an article in Rolling Stone about the administration's war on pot, federal prosecutors in Washington state sent a letter to Gov. Christine Gregoire "warning that state employees 'would not be immune from liability under the Controlled Substances Act.'"

In Colorado, mainstream banks like Bank of America (BAC), Chase (JPM) and Wells Fargo (WFC) are shunning business from state-licensed dispensaries out of fear of federal prosecution for crimes like money laundering.

Politics aside, on a strict financial basis, the valuations for these companies are out of whack.

Medbox trades at a trailing P/E well over 1,000. Using management's projections for fiscal 2016's EBITDA, the stock's enterprise value trades at a premium of nearly 20 times. If all stays rosy for Medbox, that's not an unheard-of premium for a high-growth company, but "rosy" is not how one would describe the state of the industry.

And then there's the regulatory risk, which is simply tremendous.

The Smoke Hasn't Cleared Yet

In short, we just don't know enough about these businesses yet to make a low-risk investment. Does this mean you shouldn't look into Medbox or Cannabis Science? Not necessarily. But investors would need to treat the position as money taken to the casino -- speculative and expendable.

As time goes on, and politicians continue to be influenced by the more than 70 percent of our nation's population who believe pot should be legal for medical purposes, the marijuana industry will be seen more and more as a "legitimate" business. For opportunistic investors, there will be some incredible investing opportunities.

Pot stocks may someday be the new 3-D printing stocks. For now, though, just chill, dude.

Motley Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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Marijuana Stocks: How to Legally Invest in the Ultimate Cash Crop

Medtronic is a maker of medical devices, specializing in cardiovascular products like pacemakers, valve replacements, and various items to help repair problems in the circulatory system. But Medtronic also serves a number of other areas, including ways to treat spinal problems, diabetes and chronic pain.

One downside for investors is the fact that beginning this year, Medtronic has to pay a surtax on medical-device revenue, which was imposed to help pay for the health care reform law. Even with the tax sapping its profits, though, Medtronic will benefit from the needs of more patients needing treatment for heart-related illnesses and other ailments using its devices.

This iconic drugstore chain has been around for decades, paying ever-higher dividends to shareholders. As prescription drug use grows, Walgreen stands to have more traffic in its stores, and that in turn should drive more sales of the unrelated retail goods that the company stocks on its store shelves.
In addition to benefiting from older Americans, Walgreen has made a big push recently for international growth. Aging populations in economies around the world represent a great opportunity for Walgreen to expand beyond its domestic stronghold.

MetLife is one of the biggest providers of life insurance in the country. Insurers have gone through hard times in recent years, as poor investment returns and high payouts on certain types of insurance left them reeling from the financial crisis five years ago.

But for investors, MetLife's moves have made it a stronger stock. It's decision to stop offering long-term-care insurance has been tough on older Americans seeking protection from high health care costs, but its core insurance business benefits from the longer lifespans of an aging population. With some favorable products tailored to retirees, MetLife stands to make big strides forward in the years to come.

The scope of Johnson & Johnson's business is wider than many people realize. In addition to its well-known consumer brands like Band-Aid, J&J also has sizable pharmaceutical and medical-device arms. Though many of its rivals have broken themselves up into smaller businesses to let the individual parts focus on their respective specialties, Johnson & Johnson still sees value in its conglomerate status.

Unfortunately, J&J has had problems with its hip replacement products, which led to recalls of certain devices. But the company has overcome similar short-term problems in the past. Given the size of J&J's orthopedics business, which by itself dwarfs many of the companies that specialize in orthopedic devices, Johnson & Johnson still stands to gain from rising demand once it addresses any safety concerns.

Omega Healthcare is a real estate investment trust that specializes in owning and operating health-care-related properties, with an emphasis on skilled nursing, assisted living, independent living, and rehabilitation facilities. A growing pool of retirees seeking the community environment that these facilities offer has led to higher demand in recent years, and those trends are only likely to continue as these communities benefit from the network effect of having older peers recommend them to (relatively) younger prospects.

For investors, the real estate investment trust framework ensures a steady stream of income for your portfolio. On that score, Omega's dividend yield of 6 percent stands out as particularly attractive, topping several other similar health care REITs.
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