Smoking Money: The state of marijuana stocks   8 comments

In reviewing the state of stocks related to the marijuana industry, I have come to the conclusion there is far too much garbage being traded as stocks to possibly buy a group of the stocks and expect any kind of return from the group, as most of your investment would in all probability end up worthless in a few years, if not sooner. Even for penny stocks, most of these stocks have more than enough red flags to send any reasonable investor running.

In my analysis, I removed medical marijuana stocks, as I consider these as crossover stocks with biotech. I will say the medical marijuana stocks looked much better than their counterparts, mainly due to current financial reporting, even if they are in the “early stage biotech bleeding cash” stage. Given my choice, I would rather see a current cash bleeding financial statement than a 2-year old profitable statement. At least the current cash bleeder is honest.

To start with, I picked a list of 13 stocks from various sources on the internet. Of those stocks, one was no longer trading, and 2 of them were medical marijuana stocks. Of the remaining 11, 4 of them had no revenues on their last financial. Of the last 6, 3 had not reported financials in 2013 and one had what I would call a “suspicious” name change in addition to not reporting financials since March 2013. By the end, there were only 2 stocks I would rate as reasonably clean (i.e. no flashing red sirens): Growlife, Inc. (PHOT) and Terra Tech Corp. (TRTC).

Since there are clearly not enough marijuana stocks to merit a diverse group of “junior gold miners”, that leaves me with only one recommendation: If you aren’t buying a medical marijuana stock (there are several good ones out there), that leaves only PHOT and TRTC. Neither of the companies has “pretty” financials:

Profit Margin: TRTC -173% vs. PHOT -164%
Revenue: TRTC $1.6 million vs. PHOT $3.6 million
Quarterly Revenue Growth: TRTC +635% vs. PHOT +176%
Diluted EPS (ttm): TRTC -$0.03 vs. PHOT -$0.01
Levered free cash flow: TRTC $781k vs. PHOT -$225k

If you absolutely positively MUST buy a non-medical marijuana stock, my best suggestion is to wait for something better to come along. Barring that, if you insist on buying one of these two stocks, I would suggest you split the difference and buy very small positions in both. If you held a gun to my head and forced me to choose between the two, I would pick TRTC, and that is strictly on gut feeling, plus I like the fact they do horticulture for other plants and vegetables too. That is NOT a “buy” recommendation. Frankly, I hate these two stocks, as well as most marijuana stocks.

Here is my prediction for the marijuana industry: When enough states have legalized marijuana, look for the tobacco companies to step into the business. They will blow out the small manufacturers with their economy of scale. As for the “home grown” marijuana, it is a novelty now. But I expect it to become like home beer brewing in about 5 years: a very small niche market. Once the tobacco companies step into marijuana, I would expect the product to become cheap enough to at least compete with home growing, if not blow it away in cost and time. Your best bet is to add one of the big tobacco stocks to your dividend portfolio and collect their dividends for a few years until they grow into marijuana. Some good plays here: Philip Morris (PM), Altria (MO), Reynolds American (RAI), and Lorillard (LO). Even if my prediction turns out to be wrong, you will still make plenty on dividends from these stocks. Unlike most marijuana stocks, this is a no-lose play.

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Posted January 10, 2014 by edmcgon in Market Analysis, Stocks

8 responses to “Smoking Money: The state of marijuana stocks

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  1. On a personal note I truly hope that this takes off and the big players come into the market. This isn’t an investment statement it is a statement towards a better world. On the investment side I totally agree that the small players will basically be wiped out when the big guys come in.

    As long as this stuff is still selling for $240 an ounce the bad guys will stay in the picture.
    When it hits the same price as a cigarette the bad guys won’t bother with it.

    But I do think the time line is pretty long before the big guys get into this for the same reason that banks don’t want to loan money to anyone trying to grow it. As long as it is illegal at the federal level it is too dangerous. Just because Obama sees fit to look the other way doesn’t mean that the next president will see it the same way, let alone people below him.

    • Chris,
      Banks aren’t allowed to give loans to marijuana growers due to federal regulations. Like you said, just because Obama is willing to look the other way doesn’t mean the laws suddenly disappear. And would you really want to take a chance on one of Obama’s “if you like your marijuana loans, you can keep them” moments? 😉

  2. Ed, funny you mentioned PHOT. I had it for 2 days for sold it for 40% gain. Looking to go back at the current price of 0.2. Very very small position…. mainly gambling.

  3. Buzz kill!

    I do agree with you about the 3 stocks. GWPH is up 50% since I bought it. The penny MJ stocks are all of course, gambling. I’m keep the rest of my TRTC and PHOT for now. I know everyone does this differently, but when I do penny stocks, I hope to be disciplined enough to take my original investment and a nice profit off when they double, triple or quadruple, but I do let the rest ride. One or more of these penny stocks could explode w/o warning, and as long as I’ve already booked a nice profit, I’m fine taking a chance on losing the rest. The miniscule chance of explosion is why I originally invested. I don’t understand bouncing completely in and out of them, unless you think they are totally bogus and are only in them for a momentum trade. Otherwise, they are so news sensitive, you could easily miss a huge run up – which is why I never get out completely.

    To each his own, I know.

    But, Ed. I think you are just plain wrong about the industry. It will take until the Feds legalize for tobacco companies, banks and the Home Depots, Wal-Marts and Lowes of the world to step in. That’s years away. Home brewing is not the same. Hubby does some of that. It’s unwieldy, takes up a lot of space and really isn’t worth the effort. People can easily go out to drink socially at bars, or buy a huge selection of craft beer at supermarkets. It’s not easy to get a license to sell MJ and the #s communities give out are limited. (CO retail MJ stores are going to run out of product in the next week.) You still can’t smoke MJ in public – that’s years away, too, if it ever happens.

    As for investing in big tobacco – I never have and I never will. Yes, I’m sure some funds in IRAs when I worked were, and probably some stuff I have now that I’m not aware of, but I do the best I can. Unlike guns, MJ, casino stocks and some other things where there are legitimate moral issues for and against, there isn’t anything legitimate about tobacco other than it is legal. The sole purpose of a cigarette is to get the user addicted as quickly as possible so he buys more and is hooked for life. He will then have a much, much higher incidence of serious health problems than a nonsmoker and his addiction can even kill him. That’s just fact. I can’t see how to make the stuff illegal, but there’s more we could be doing (http://www.skynews.com.au/health/article.aspx?id=940143) and I certainly, for my miniscule part, will never support tobacco with my money.

    • QD,
      GWPH is a stock I would classify as medical marijuana, so it wasn’t included in my “survey”. This article is more about stocks involved directly or indirectly with retail marijuana. And yes, I own GWPH too, and the 50% run-up has been very nice. 😉

      I don’t disagree with your view of the marijuana industry for the next few years. However, many of the legitimate businesses involved in it will be privately owned, which means no investment opportunities for us. Maybe they will have an IPO eventually? But what’s left on the equity markets for now looks like the dregs to me.

      As for your views on tobacco, I fully respect your moral stance. I personally won’t invest in Sea World (SEAS) for moral reasons.

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