Blog : 4 Marketing Trends to Look At When Picking an MJ Penny Stock

by Ed Zwirn on November 24th, 2014

The American people seem to be set do something they haven't done since the end of Prohibition in the 1930s, when they in effect made an illegal "drug" legal by allowing the distribution and possession of booze.

The most recent election has seen two more states, Alaska and Oregon (along with the District of Columbia), legalize recreational use of cannabis, joining Washington and Colorado, which did the same in 2012. Even the Florida medical cannabis vote, which failed to meet the 60% constitutional amendment threshold, nonetheless managed to get 58% support. And some two dozen states have moved to decriminalize possession.

Colorado's experience has been going on for the longest time. We know have about 10 months of Colorado data worth analyzing concerning the overall revenues and more specific marketing trends for what had until recently been a clandestine product.

Harvard business school marketing professor John Quelch, in a soon-to-be-released study, looks at the emerging marketing trends associated with the nascent "Big Marijuana" era (based upon the Colorado experience so far) and comes up with some surprising conclusions:

1) Although the extent to which illegal demand goes down as a result of increasing legal availability remains an open question, it is certain that overall demand will increase. "You'll have people demanding it who wouldn't have demanded it before," Quelch says in an interview with Harvard Business School's Working Knowledge newsletter.

And early indications from Colorado show this prediction panning out. For the six months between January and July, recreational marijuana accounted for 80% of the $25 million in tax revenue from MJ sales, with the state predicting $134 million for the next fiscal year. The effect of this expansion could eventually propel MJ revenues, which are already estimated to be at least $40 billion (legal and illegal) annually throughout the U.S., to even higher levels, rivaling alcohol and tobacco.

2) This recreational segment of the MJ market is expanding greatly through the use of products that give consumers the option of eating marijuana as opposed to smoking it. According to Quelch, about 50% of the MJ sales in Denver establishments have come in the form of edibles, and a large portion of this is apparently being driven by new consumers. These people are entering the market for the first time and "aren't interested in smoking joints, because that's a dirty habit," says Quelch. "But if you give them pot in a cookie, they have no problem with it."

3) The recent unveiling of a Marley Natural cannabis brand notwithstanding, the potential for Big Marijuana's creation of a national mass-market brand of MJ. After all, marijuana sales remain illegal on a federal level and in the bulk of U.S. states. For now, the logical successors to the wildcat marijuana industry, large cigarette and alcohol companies, are sitting on the sidelines, at least until legalization approaches critical mass. "I believe guys like Philip Morris and R.J. Reynolds are looking carefully at this, but they are not going to make a move until the recreational market is more established and looks to go national."

4) It may be a while before you see Marley Naturals on sale at a convenience store near you. This makes the coming months the ideal time to do homework and get in early on a newly materializing (and growing) market. In an effort to achieve economies of scale while positioning themselves to be bought out by the big guys, expect to see some enterprising MJ companies become legally available across boundaries. "I think you'll definitely see a couple of companies get licenses in more than one state," says Quelch, pointing out that it is in any case cheaper to truck marijuana, than, for example craft beer. These companies may well wind up being the ones in which to drop your dime if you want to get in on the ground floor.

There is undoubtedly much opportunity for investors to either win big (or lose big) by investing in marijuana penny stocks. Part of the reason for this wide risk parameter is because there are many shaky companies out there looking to capitalize on the new visibility coming with each move towards MJ legalization.

Granted that the shaky companies may be more numerous in the MJ sector than elsewhere, that is no reason to avoid the sector per se, provided you do your homework and look at things like balance sheets. The same principles used in Leeds Analysis can help you weed out duds in the weed kingdom.

Assuming the MJ legalization wave progresses, the real opportunities will come from the anticipation of marketing opportunities. This is because the data is just coming in. Pretty soon Quelch's study will be only one of many delineating the different segments of the MJ market, along with its pricing sensitivity and consumption method preferences. Until then we are being offered the opportunity to guess right (or catastrophically).