Marijuana stocks have soared over the past few months, with the Marijuana Stock Index jumping more than 934% since October 2012 compared to just 4.6% for the S&P 500. The majority of this move can be credited to ongoing legislative efforts – including numerous state ballots in the November 2012 elections – that have resulted in the legalization of marijuana for both medical and recreational use on a state level.
Federal law may hold marijuana in the same class as harder drugs like cocaine, but many states have started to relax their laws on the substance. Marijuana is legal for medical use in Alaska, Arizona, California, Hawaii, Maine, Michigan, Montana, Nevada, New Jersey, Oregon, Rhode Island, and Vermont, and legal for recreational use in Colorado and Washington. With so many states rebuking federal law, many advocates insist that change is afoot.
The Size of the Addressable Market is Impressive
While it is challenging to calculate the size the addressable market in the United States because it in the very early stages of transparency, Washington Financial Management, a West Coast based think tank, has estimated the addressable market as $46 Billion, as reported at end of November 2012 by the San Diego based MMJ Biz Daily.
Parallels to Alcohol Prohibition
Many marijuana advocates like to draw a parallel between their efforts and the repeal of the 18th Amendment – the Volstead Act banning the consumption and sale of alcohol. Both substances were banned through acts of Congress, citing their negative effects on society and addictive nature. But, public opinion eventually led to many individual states enacting legislation repealing alcohol prohibition laws on a state-level, eventually leading to a federal repeal.
While there are some key differences, such as the level of public support and prosecutions when federal laws were still in effect, these parallels give hope to a federal-level legalization. Recreational marijuana may therefore prove to be more difficult, but public support for medical marijuana has been robust. In fact, nearly three-fourths (73%) of Americans support the legalization of medical marijuana, spanning political parties and demographic groups.
Pushing for Federal Legalization
Earlier this month, democratic lawmakers from states that recently approved marijuana legalization measures introduced two new proposals aimed at ending the ban on the drug on a federal level. Reps. Jared Polis of Colorado and Earl Blumenauer of Oregon introduced two separate bills arguing that the human and fiscal costs of pot-related offenses was extraordinary and the potential benefits of taxation and economic growth could be significant. “We are in the process of a dramatic shift in the marijuana policy landscape,” said Blumenauer in a written statement. “We want the federal government to be a responsible partner with the rest of the universe of marijuana interests while we address what federal policy should be regarding drug taxation, classification and legality.”
The proposed tax models would be similar to those in place for alcohol and tobacco. Mr. Blumenauer’s bill would impose a 50% excise tax on the first sale of marijuana from growers to retailers, while marijuana producers would pay an annual $1,000 fee. Mr. Polis’ bill was largely similar in scope and both would give states the choice of whether or not to legalize the drug, and ensure that the federal government doesn’t intervene in legal state businesses.
Playing the Trends with Stocks
Investors looking to capitalize on these trends have a number of different options. While marijuana remains illegal on a federal level, companies like GrowLife Inc. (PHOT), Medical Marijuana Inc. (MJNA), and HEMP Inc. (OTCQB:HEMP) all offer different ways to play the potential in the sector. Some may also directly benefit from the recent legislation that legalizes the substance on a state level for either medical or recreational use.
GrowLife is perhaps the most interesting of the group, given that it features a very legitimate product line-up for a rapidly growing user base, and because GrowLife is uniquely positioned as fully reporting public company on the OTC. With affordable indoor growing kits for individuals and industrial growing solutions for companies, the firm has carved out a niche in the indoor marijuana growing industry. As well, the company is also rapidly expanding with their online presence, www.greners.com, and brick-and-mortar retail locations in California.
We asked GrowLife CEO Sterling Scott to comment on the trends and to explain how the company was positioning itself for growth in this unique industry. “Our business at GrowLife (PHOT) is supporting the medical marijuana industry with an expanding range of products and services. On the horizon, GrowLife expects that the national dialogue initiated by the Obama administration about medical marijuana is likely to be resolved by changing the federal position to reduce conflicts with the existing law in 18 (and counting) states. If this happens, and we believe it is under consideration, then one can expect a geometrical expansion in the scope of what is allowed for GrowLife and other public companies."
"We are everyday building on our existing base of equipment brands and sales channels and positioning the company to participate in services and value added products for this unique specialty industry.” Of note is that Mr. Scott was a practicing attorney for more than 20 years based in Washington DC, and during that time was engaged in federal regulatory law and compliance.
While companies like Medbox Inc (OTCQB:MDBX) rely on approvals and others have ambiguous business models, GrowLife is already generating revenues and poised to breakeven on a cash flow basis over the near-term. Expansion strategies and new subsidiaries already in place also suggest that revenues will continue to grow at a sound rate into the future. Combined, these elements make the stock a seemingly safer play that’s still poised to capitalize on the improving legal environment.