No More Blowing Smoke: High Gains in Pot

Back in 2012, our beloved founder Addison Wiggin penned a piece entitled, “Winners and Losers in the War on Weed,” in which he predicted the International Narcotics Control Board would take any and all necessary measures to bring a screeching halt to the relaxation of marijuana regulations in our country. He wrote:

On Nov. 6, voters in Colorado and Washington decided to legalize marijuana for recreational use. (They’d legalized it for medical use years ago.) But as we go to press, the head of the INCB— a U.N. agency — is raising a squawk.

The ballot initiatives send “a wrong message to the rest of the nation and it sends a wrong message abroad,” says Raymond Yans. Further, he hopes U.S. Attorney General Eric Holder “will take all the necessary measures” to keep pot illegal in all 50 states.

We can confidently predict he will: There are too many vested interests at stake.

Similarly, in February of this year, Dave Gonigam echoed this sentiment, writing:

Days after voters in Colorado and Washington state voted to legalize recreational pot in November 2012, we issued a dispatch…

Our premise: There were too many vested interests who wanted ganja to remain prohibido. They would get their way… and profit accordingly.

Of course, police unions led the way opposing legalization. But the “second biggest opponent on Capitol Hill is Big Pharma,” said Howard Wooldridge. He’s an ex-cop who co-founded LEAP — Law Enforcement Against Prohibition. Marijuana can take the place of “everything from Advil to Vicodin and other expensive pills,” he told Republic Report.

Another leading opponent — alcohol companies. When California voters turned down a recreational pot referendum in 2010, a major funder of the “no” campaign was the California Beer & Beverage Distributors.

Anti-pot advocates have their reasons, and in the past they’ve held a lot of sway, but the fact that this alleged crackdown Dave and Addison wrote about two and a half years ago never happened is perhaps the most compelling evidence of all.

Case in point: Just last year in March, Dan Steinhart wrote a piece for The Daily Reckoning, entitled “An Investor’s Take on the Marijuana Market” in which he predicted a changing frontier, writing:

As you surely know, Colorado and Washington recently became the first states to legalize marijuana for recreational use, joining 18 other states that have legalized it for medical use only.

Legalization is gaining steam across the US, and that’s unlikely to change — if only because, other than citing fake facts, opponents of legalization have no argument.

Opposition to legalizing marijuana is dwindling for the same reason that opposition to gay marriage is dwindling: there’s no intelligent reason to oppose either one.

Unless, in the case of marijuana, you’re concerned with its potential to cause more car accidents. But if those are your standards, we should criminalize beer, cellphones, and makeup, too.

One thing’s for sure: the investment world is enamored with the idea of a brand-new green industry.

You hear that? It’s the sound of profitable pot naysayers whistling a different tune. Pot stocks’ time has come because of the big tax revenues in several states, the new laws taking effect in those states to regulate and tax medical marijuana, and some signs of easing up from the White House.

Potential Tax Revenues

In just one year, Washington state has brought in a whopping $70 million in tax revenue from legal marijuana sales. Business Insider reports:

Washington launched its second-in-the-nation legal marijuana market with just a handful of stores selling high-priced pot to long lines of customers. A year later, the state has about 160 shops open, tax revenues have soared past expectations and sales top $1.4 million per day.

This month, two new laws take effect, one to regulate and tax medical marijuana, and one to cut Washington’s three-level excise tax on pot to a single, 37-percent tax.

Despite some industry gripes and those tweaks to Washington’s legal pot law, which voters passed in 2012 to legalize marijuana for adults over 21, officials and legalization backers say the state’s slow and deliberate effort to regulate marijuana has been a success.

Raking in more than $250 million in marijuana sales in the past year — roughly $62 million of which constitute marijuana excise tax — the state’s original forecast of $36 million went up in smoke, quite literally. Business Insider continues:

…When state and local sales and other taxes are included, the total payday for the state and local governments tops $70 million.

That’s real money, if only a drop in Washington’s $38 billion two-year budget. Colorado’s recreational sales began Jan. 1, 2014, and brought in taxes of $44 million in the first year.

The tax revenue could continue to keep climbing.

And as other states watch Washington and Colorado, the only other state with legal marijuana sales, bring in more money, they’re ever more seriously considering following suit, as Oregon and Alaska have already.

“Nobody’s counting on the revenue from cannabis sales to save us, but it has an impact,” David Zuckerman, a Vermont state senator and legalization advocate, said during a recent visit to Seattle. “The more important thing is that the sky didn’t fall in Colorado. The tidal wave hasn’t hit Seattle. They’re showing us that this can be done.”

And done it should be. At a time when debt and deficits are plastered all over the nightly news, having a country in which marijuana is legal, but taxed and regulated like other goods, could spell prosperity for a lot of states.

According to a report from prohibitioncosts.org, “Replacing marijuana prohibition with a system of taxation and regulation similar to that used for alcoholic beverages would produce combined savings and tax revenues of between $10 billion and $14 billion per year,” according to a June 2005 report by Dr. Jeffrey Miron, visiting professor of economics at Harvard University.

The report continues, offering these enlightening factoids:

  • Replacing marijuana prohibition with a system of legal regulation would save approximately $7.7 billion in government expenditures on prohibition enforcement — $2.4 billion at the federal level and 5.3 billion at the state and local levels.
  • Revenue from taxation of marijuana sales would range from $2.4 billion per year if marijuana were taxed like ordinary consumer goods to $6.2 billion if it were taxed like alcohol or tobacco.

These sales and taxes are real money, unlike the fiat currency getting pumped out by the Feds on a daily basis. What could we potentially do with this money, if we had it to put to good use?

These impacts are considerable, according to the Marijuana Policy Project in Washington, D.C.

For example, $14 billion in annual combined annual savings and revenues would cover the securing of all “loose nukes” in the former Soviet Union (estimated by former Assistant Secretary of Defense Lawrence Korb at $30 billion) in less than three years.

Just one year’s savings would cover the full cost of anti-terrorism port security measures required by the Maritime Transportation Security Act of 2002. The Coast Guard has estimated these costs, covering 3,150 port facilities and 9,200 vessels, at $7.3 billion total.

Regardless of the financial benefits, society is changing. There simply seems to be an overall shift in the public perception, and as courts begin to give their blessings to cultural changes that are already taking place, we’re looking at a cannabis revolution as public support grows.

In an article from the Mises Institute from 2013, author Mark Thornton predicted the adoption of a more “chill” vibe after Colorado voters approved a big tax on recreational marijuana:

“The voters of Colorado voted to put taxes on the sale of newly legalized marijuana. The taxes add up to a 25% tax on marijuana consumers.

Overall, it seems that cooler heads seem to be prevailing withPresident Obama reversing his position on enforcement and Dr. Sanjay Guptareversing his position on legalizing marijuana.”

What’s more, the very latest announcements from the White House might finally be signaling the “all clear” for investing in this extremely volatile sector.

yes-we-cannabis

Source

In the next few weeks, President Obama is expected to free dozens of federal prisoners serving lengthy terms on nonviolent drug convictions. Obama will “probably commute more sentences at one time than any president has in nearly half a century,” the New York Times writes. Here’s more:

The expansive use of his clemency power is part of a broader effort by Mr. Obama to correct what he sees as the excesses of the past, when politicians eager to be tough on crime threw away the key even for minor criminals.

With many Republicans and Democrats now agreeing that the nation went too far, Mr. Obama holds the power to unlock that prison door, especially for young African-American and Hispanic men disproportionately affected.

Among those Mr. Obama granted clemency in March were eight prisoners serving life sentences for crimes like growing more than 1,000 marijuana plants.

With legalization comes an expected decline in crime rates and prison populations — both powerful incentives to decriminalize, and eventually legalize, marijuana.

Agricultural Impact

75% of the marijuana sold in the United States is grown in California — not Mexico — and there are approximately 71,000 acres of marijuana under cultivation each year in the golden state, according to Sgt. Mike Horne of the Ventura County (Calif.) Sheriff’s Department narcotics bureau.

And, with dispensaries popping up left and right and the government loosening its stranglehold on cannabis, entrepreneurs and start-ups all over the country are creating and designing innovations that could potentially help transform the broader industrial agriculture sector.

In the forests of British Columbia, Dan Sutton is busy building what he believes will be the most energy-efficient, high-tech greenhouse for growing grass. International Business Times reports:

Spurred by the booming market for medical marijuana, he and a group of biologists and engineers have experimented for almost three years with digital sensors, lighting arrays, software programs and ventilators to design a greenhouse system with the lowest energy costs and highest crop yields.

“We said, ‘Let’s assume everything that’s ever been done in cannabis cultivation is wrong, and we have to build from the ground up,’” said Sutton, the 28-year-old managing director of Tantalus Labs in Vancouver.  “We have this broad realm of science that no one has been able to previously explore.”

The startup is among a growing number of companies in North Americadesigning new products and systems specifically for the cultivation of cannabis, a finicky crop that needs a precise balance of light, moisture and water to thrive.

Although these cannabis ventures aren’t exactly reinventing the wheel — greenhouse technologies have existed for decades — they are injecting the kinds of capital and brainpower into the field of industrial agriculture that simply wasn’t there a decade ago.

And it’s not just Spicoli stoners who will benefit, either. These useful technological advances could easily spread to other industries, too:

They’re also adding a new level of urgency. As more countries and U.S. states soften their policies on both medical and recreational marijuana, companies are racing to become the industry leaders in data-mining software, ultra-efficient lamps and water-sipping irrigation systems.

These tools will benefit more than marijuana growers alone: Industrial food producers and tree growers could adapt the same technologies to cut energy costs and boost their crops. Operators of large buildings could use the systems to lower their electricity use.

Troy Dayton, CEO of ArcView Group, a cannabis-industry research firm in Oakland, California, seems to agree:

Cannabis is spurring on an ag-tech revolution. This is a boom born entirely out of ending repressive laws.

The market is already there, it’s just moving from the shadows into the light. That’s why you’re seeing this incredible growth and why so many people see it as a once-in-a-lifetime [business] opportunity.

See for yourself how cannabis is becoming America’s fastest growing industry in this video, featuring Troy Dayton himself:

With 23 states (and counting) having already legalized medical marijuana, and a small handful allowing recreational sales, this is a market that is rapidly expanding in our country, and it’s certainly not slowing down.

Which States Will Legalize Next?

A better question might be which states won’t legalize next? Dramatic social changes, shifting public attitudes, big profits, and lucrative emerging technologies are enticing many states, especially after seeing how successful the guinea pig states like Washington and Colorado have been.

Just last week, Reason.com published an article about the ongoing effort to legalize marijauna in California — and elsewhere — in 2016:

We see another long-in-the-making social change on the issue of marijuana.

A recent poll by the Public Policy Institute of California found 55 percent of likely California voters in favor of legalizing weed for recreational uses. Support for such an idea was barely perceptible decades ago.

…In 2012 Washington and Colorado voters approved legalization for adults and in the 2014 midterm elections voters did the same in Oregon, Alaska and Washington, D.C. There are plans for initiatives in seven other states in 2016.

Even before we hit 2016, the market is already expanding very rapidly in the U.S.

23 states have already legalized medical marijuana, and three states –Alaska, Colorado, and Washington — allow recreational sales as well. Oregon voters approved a ballot measure this past fall, for a policy allowing personal use and limited cultivation. That policy took effect nine days ago on July 1.

The good folks over at Reason put together a handy article detailing which states will legalize pot next (their states to watch include Ohio, Nevada, California, Massachusetts, Maine, and Arizona). You can read it in its entirety here, but here are a few good snippets:

Kayvan Khalatbari [co-owner of the Denver Relief dispensary] predicts that “up to a dozen states” will have legal marijuana by the end of 2016, which may not be far from reality.

Last year Alaska, Oregon, and the District of Columbia joined Colorado and Washington, where voters also approved legalization in 2012. Similar ballot initiatives have a decent or better chance of succeeding in at least half a dozen states this year and next.

How to Profit

I’m not the only one urging folks to see past the smokescreen and consider cannabis as a viable investment portfolio. Last year, Yahoo Finance spoke to Todd Harrison, CEO and founder of internet-based financial media company MInyanville, who thinks that marijuana “will be the single best investment idea for the next ten years.”

Harrison goes on to detail how the public can profit from recreational marijuana as an investment theme, which he believes will be driven by the broader legalization of marijuana, inspired by states’ need for tax revenue. Yahoo continues:

Wall Street currently doesn’t cover the marijuana market as an industry but once legalization is more widespread, that will be the inflection point when we marijuana investing moves mainstream, says Harrison.

Currently the chatter is mostly about marijuana penny stocks. They are not what Harrison is talking about. He says those stocks are very risky and volatile, and he doesn’t touch them.

But there are some “real” companies generating interest.

Harrison cites the cannabinoid prescription medicine company GW Pharmaceuticals (GWPH) as an example. He’s not suggesting the stock as a buy or sell, just as an example he’s traded in the past. The stock has rallied more than 500% since last summer.

Also last year, Cody Willard from MarketWatch seemed to agree, advising readers to stay away from hyped-up penny stocks, and, if you’re so inclined, to look elsewhere:

You will likely lose all your money playing penny stocks… But that doesn’t mean you can’t find some stellar investments to play the legalization of marijuana in the US.

The best stocks for legalized pot are companies that will supply the coming industrial-sized marijuana farms, such as Calgone  CCC, Lindsay  LNN and Aegion AEGN. It’s not a direct line (yet), but companies like $CCC, $LNN, each of which I own personally for years now, are the best legalized pot plays. $AEGN too.

As the legalization of marijuana inevitably leads to the creation of industrial-sized pot farms, the demand for resources necessary to fuel said farms will be huge. And, the cultivation of these farms will drive a technology revolution in industrial agriculture like we’ve never seen before.

The main focus on the technological developments in the marijuana sector is ventilation, lighting, and interior cooling. Together, these factors account for as much 70% of the cost to grow a single gram of marijuana.

The latest systems are being built to guzzle less electricity while producing more crops, or designed to respond to changes in sunlight, temperature, and water. There are even technologies being developed to collect data so growers can customize their greenhouses and optimize their systems for the best cannabis conditions possible.

International Business Times offers some insight into one of the top dogs in the marijuana tech business:

One of the leaders in this technology field is Heliospectra AB. The Swedish lighting firm began building cannabiscentric light-emitting-diode lamps three years ago.

The company claims its model can shine brighter, last longer and cover more distance than do existing models… and Heliospectra’s software program lets growers control the intensity, spectrum and timing of the artificial rays.

Chris Walker, the firm’s U.S. general manager in San Francisco, said Heliospectra aims to make its lamps the dominant choice for cannabis growers and edge out the conventional high-pressure sodium bulbs used in most indoor and greenhouse operations.

Companies just like Heliospectra are getting in on the marijuana market for three key reasons; cash, cool factor, and demand.

Cash

Unlike tomato and pepper producers, cannabis growers boast wide profit margins, giving them a bigger budget for top-of-the-line technologies and a greater appetite for research and experimentation.

“We have an opportunity to play in a space with beautifully broad margins,” said Sutton of Tantalus Labs. “That’s not true of most food production.” A tomato producer in a greenhouse might earn roughly 10 percent profit on its revenue, before operating costs, while a cannabis grower in a similar setup could rake in as much as 80 percent, he estimated.

“With tomatoes, if you take on an extra 5 percent on your bottom line to experiment with new technology, that could affect your competitiveness,” he said. This isn’t the case with marijuana.

Cool Factor

Young technology whizzes and expert plant biologists are both bringing their skills to the burgeoning sector.

“For the newer generation that’s just getting out of college or new to the workplace, cannabis is a more interesting project than say a real-estate project, or a lettuce project,” said Michael Mayes, CEO of Quantum 9 Inc., a Chicago consulting firm for cannabis cultivation and manufacturing. “The cool factor can drive innovation.”

Demand

There is plenty of demand among growers. As they build new greenhouses and indoor facilities, they’re interested in shaving off as much electricity and water consumption as possible to reduce operating expenses and protect profit margins as more players enter the market.

“Operators with an eye toward the future are trying to get ahead of the pack now, so that in five years, when the landscape is entirely different, they’ll have a competitive advantage,” said Zev Ilovitz, president of Envirotech Greenhouse Solutions in Richmond, California, which designs and builds greenhouses for cannabis growers.

Just like the most recent ruling from SCOTUS regarding gay marriage, it’s just a matter of time before certain states come around and the courts catch up with cultural changes that have been happening for a while now.

Pot is going mainstream, and there is real potential to profit here.

Going back to Troy Dayton of ArcView Group, he certainly agrees. “The cannabis industry is still in the earliest stages of its technology ‘renaissance,’ and the only thing holding it back are prohibitive marijuana policies in certain states.” IBT continues:

Even so, the gradual easing of cannabis laws is already drawing interest from mainstream businesses, including a subsidiary of Scotts Miracle-Gro Co.

The company’s Hawthorne Gardening Co. in April purchased General Hydroponics Inc. and Bio-Organic Solutions Inc., which make liquid nutrients for indoor marijuana cultivation.

Terms were not disclosed, but the acquisition should make Scotts, with its $2.97 billion in annual revenue, a formidable player in the marijuana market.

Despite our past predictions, it’s clear there’s real green in greenery. Don’t let the chance to invest go up in smoke.

À tout à l’heure,

Genevieve LeFranc
for The Daily Reckoning

P.S. When you sign up for the Daily Reckoning, you will receive just that; timely and entertaining ideas everyday that will help you understand how markets work. Did I mention it’s free? Because it is! Sign up here today to start receiving the Daily Reckoning to your inbox, completely free of charge.