the new sa articleSince the floodgates broke with California legalizing medical marijuana in 1996, some 20 additional states have made marijuana available with a valid doctor's prescription. The medical benefits are numerous. Whether you're dealing with chronic pain, multiple sclerosis, Alzheimer's disease, breast cancer, HIV/AIDS, or a score of other ailments, medical marijuana has significant medical benefits.
According to this website, there are currently over 2 million Americans who currently use medical marijuana. This number is likely to go up significantly in the future as more states decriminalize the drug in the future, and as the stigma surrounding cannabis use wears off.
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As expected, investors have bid up the shares of the largest publicly traded company in the sector, Medical Marijuana Inc. (MJNA.PK). Over the past year, the share price has gone all the way from 2 cents to 50 cents, settling at just about 18 cents as I write this article. It's one of the most volatile stocks out there, as Google Finance lists its beta as 3.09, making it over 3 times as volatile as the market as a whole.
With respect to all those who have invested in the company, I wouldn't invest a dime in MJNA. The company has a market cap of $144M, and hasn't even hit $10M in revenue. Earnings are essentially zero. The company is issuing shares like crazy, over the past year the share count has increased over 50%. People aren't investing in MJNA, they are speculating on the future of medical marijuana, and MJNA is the biggest and most liquid vehicle to do so.
I'd like to suggest investors play medical marijuana in a different way: buying big tobacco.
For those of you unaware, Philip Morris (PM) is the publicly traded pure cigarette play, and Altria (MO) has completely rid itself of everything but smokeless tobacco, wine, and a 28% stake in brewer SAB Miller.
The first issue in this strategy is figuring which company to buy. While the natural fit is with the tobacco company, Altria has shown a history of getting into industries that further diversify the company. Considering the attractive dividends, I'd take a position in both, but just until either company gives some additional hints towards getting in this business. I think Philip Morris is considerably more likely to expand into marijuana, so the rest of this article will focus on it.
Philip Morris has everything needed to make a big expansion into medical marijuana. They have experience training and managing a sales force that sells a similar product. They've got the cash flow and the access to capital needed to invest in facilities to grow it. They've also got the motivation, as they'd be getting in their first major growth industry in years.
Medical marijuana is one of the most fragmented businesses in America. The industry is filled with small time operators, one man operations doing a few hundred plants at a time. If PM can come in and add scale to the process, they can increase margins. They'll also add an air of legitimacy to the whole business, further bringing it into the mainstream.
Increasingly, medical marijuana is being consumed through food and through vaporizers. If Philip Morris aggressively goes into the business, they're an attractive source of supply for a major food company that wants to produce food with cannabis already in it.
I also believe that the U.S. Government will one day make small amounts of weed legal. This won't happen for maybe decades, but positioning themselves for this eventuality early ensures Philip Morris is the leader in this industry when it does become legal. Who would you deal with - a multi billion dollar company or a bunch of small farmers?
There is little doubt that medical marijuana use is going to go up. Philip Morris has the opportunity to get behind this major trend. Investing in it gives you exposure to the cash cow cigarette business while you wait for the company to expand into medical marijuana. I think it'll happen.
Additional disclosure: Can you make the primary ticker MJNA? And add the link to the ticker in the article. Thank you.
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