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.