Blog : 3 Possible Game Changers for Marijuana Stocks

by Ed Zwirn on October 26th, 2014

First the bad news: Marijuana stocks remain a dicey proposition. There are many dicey penny stocks out there offering investors a chance to buy into companies with either a real or touted connection to the MJ industry, and you can expect at least some of these to receive a healthy bump in the coming days. Investors are probably lighting up as I write this, viewing the news generated by the many state and local MJ ballot initiatives to be put before voters on Nov. 4. At least some of these are entering online trades.

As Peter Leeds has pointed out earlier in this space, this plunge into an MJ stock may in fact be the first foray into stocks for many of these folks. Watching the quotes on some of these stocks soar as their product receives a higher profile will probably convince novices to jump on the bandwagon, propelling even disreputable pink sheet stocks to new unjustified heights far beyond anything warranted by earnings (if any) and balance sheet assets (if any).

And face it, marijuana is still illegal for any purpose throughout the much of the country, and under misguided federal law, which classifies MJ as a Schedule I substance, along with heroin. This means there are still formidable hurdles to be overcome if these speculative small-cap stocks are to be able to capture a significant share of the potential domestic MJ market, which is estimated to be at least $40 billion annually.

Novice investors dabbling in shaky companies engaged in an uncertain business arena spell a great deal of volatility and outsized risk until this industry really sorts itself out, however long that takes. But, in the meantime, investors should look at three current developments in the MJ news cycle that may very well prove to be game changers over the longer haul:

1) The MJ Industry Enters the Campaign Finance Arena: Currently 23 states and the District of Columbia allow some degree of legal medical or recreational marijuana adult use, including the states of Colorado and Washington, which have the loosest regulations and which have already seen legal sales ramp up past original expectations. This means that for the first time many MJ-related companies are actually posting profits (legal ones at any rate) for the first time.

And while companies are becoming increasingly able to post MJ-related revenues for all the world to see, at least some of this money is going into key political races crucial to the future of the legal MJ sector.

For one thing, it has long been a truism in U.S. politics that ballot referendums are a great way to stimulate political spending. This is holding true this election cycle, with the Florida medical MJ initiative and the Oregon recreational referendum together generating about $8.3 million in campaign spending (as of Oct. 14), not to mention the other statewide measures up for a vote.

But the news this time around is that the MJ industry itself is getting involved in this latest election. The National Cannabis Industry Association, afraid of being outspent in the Florida contest, which requires 60% voter approval, has sent out an association wide appeal for donations to the cause. In addition, the industry itself has donated about $113,000 to candidates as of Oct. 15, a number which will ramp up as Nov. 4 approaches. Tops among these donors has been the Marijuana Policy Initiative, which donated $66,750, and the National Cannabis Industry Association, which is making campaign contributions for the first time and has so far given $27,000. About $20,000 of this has gone to the Colorado Congressional delegation.

While these sums may appear far from impressive when judged in relation to the obscene amounts being pumped into the U.S. political system as a whole, and are in fact dwarfed for the time being by donations from anti-MJ interests, they represent a sea change over the longer-term perspective. Bear in mind that this is the first time many of these MJ entrepreneurs (while they may have privately supported pro-MJ candidates and measures in the past) have come out of the closet with campaign contributions. At the same time, with the stigma attached to the product lessening, MJ advocates are finding for the first time that they have candidates willing to accept their open financial support.

This boom for politicians may or may not rebound to benefit your MJ stock. Political initiatives can always be defeated, cutting off new markets and generating negative publicity. But it will be worth paying attention to the extent to which this boom ramps up (which it will).

In my next installments, I will look at the two other game changers I promised: 1) The Florida referendum, and why it promises to significantly boost the MJ industry if successful and at the same time radically alter the profile of the typical MJ aficionado, and 2) Why the latest numbers from Colorado may mean that the national MJ market is larger that we thouight. Stay tuned (and stay mellow).