As public sentiment continues to shift in favor of marijuana legalization and more states legalize medical (and in some cases even recreational) marijuana, more people than ever are wondering whether now is the time to invest in marijuana. This interest persists despite the fact that the federal government bans both recreational and medical marijuana use and could shut down states' marijuana operations at any time.
With the federal ban in place, it's not easy to invest in marijuana in the public markets. There are no ETFs or anything of the sort, so the only option for public market investors is individual marijuana-related stocks. We asked our Motley Fool contributors whether it's finally time to invest in marijuana. Here's what they had to say.
I wouldn't touch any of the marijuana stocks in the market today.
There's no doubt that public sentiment is shifting. According to the General Social Survey, which polls Americans in person on various topics every two years, the percentage of Americans in favor of marijuana legalization has grown from 16% in 1990 to 52% in 2014. Recreational marijuana use is now legal in Alaska, Colorado, Oregon, Washington, and Washington, D.C., while medical marijuana use is legal in 23 states, Guam, and D.C.
That said, most of the marijuana-related stocks in the market today don't have real businesses, and the few that do are so overvalued that they're not worth your time. A good example is GW Pharmaceuticals (Nasdaq: GWPH), which has a market capitalization of $2.2 billion. While the company has a drug on the international market to treat multiple sclerosis, Sativex, its sales have been underwhelming. It has other drugs in trial, but for those to have any hope of commercial success, the U.S. would have to end the federal ban on medical marijuana.
The company is expected to continue to lose money for the next few years, which means you can only value the company based on sales. Currently, the company trades for a whopping 50 times sales, so you're paying a high price for a lottery-ticket stock. Even in the unlikely event that medical marijuana becomes legal across the U.S., GW Pharmaceuticals' drugs still need to prove effective and pass FDA trials. Your money is better invested elsewhere.
A lot of people are trying to get rich from the marijuana legalization trend, largely focusing on tiny companies that have substantial growth potential if things go exactly right in their respective industry niches. Yet what many investors don't truly understand is that if marijuana becomes legal nationwide, it'll be well-established corporate giants that already have huge distribution networks that have the best chance to capitalize.
For instance, no one would be better positioned than tobacco giants Altria (NYSE:MO) and Reynolds American (NYSE:RAI) to develop mainstream marijuana products in the event of national legalization. Both companies already have massive operations to get tobacco cigarettes to customers across the nation, and they have the infrastructure in place to comply with sophisticated regulatory and tax requirements that differ from state to state. With tobacco cigarette volumes having fallen steadily over the long run, Altria and Reynolds American would jump at the chance to have another tobacco alternative to sell, and the marketing machines that have produced key brands like Marlboro and Camel could in turn create recognizable marijuana brands with decades of future potential.
If you really think marijuana will become legal, don't waste your time with pipsqueak penny stocks with no track record of success. Instead, think about the companies that will run away with the big prize.
Like my Foolish colleagues, I think the current population of so-called "marijuana stocks" are far too risky to warrant serious consideration. Here's why.
The marijuana legalization effort is gaining serious momentum right now, with the Compassionate Access, Research Expansion and Respect States Act, or CARERS Act, being debated in the Senate. In a nutshell, the CARERS Act -- or the mirror bill presently in the House -- would make marijuana a states' rights issue, and reclassify the drug from a Schedule I to a Schedule II. That would immediately lift the banking and various other operational restrictions that haunt most marijuana businesses, even in states that have decriminalized the drug.
Once Federal prosecution is no longer a risk, though, major companies like Altria, Reynolds American, CVS Health (NYSE: CVS), Rite Aid (NYSE: RAD), and perhaps even Wal-Mart (NYSE: WMT) will probably enter the market -- presumably wiping out these ground-breaking marijuana pioneers in the process.
On the medical side, the CARERS Act would likely result in a bevy of new research at U.S.-based institutions and pharmaceutical companies, potentially negating the early strides of ex-U.S. entities like GW Pharmaceuticals (NASDAQ:GWPH).
All told, the legal landscape is still a huge unknown, and the looming changes ahead don't appear to favor poorly capitalized start-ups.
Dan Caplinger has no position in any stocks mentioned. Dan Dzombak is a long-term investor who owns shares of Altria Group and writes about happiness. George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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