How to Profit From Legalized Marijuana
- 54% of Americans smoke it...
- Fertilizing your home-grown
- How to grow your own
Marijuana is going to be effectively legalized in the not too distant future. Twelve states have already decriminalized possession of small amounts of marijuana, and I fully expect that number to inch closer to 50 in the coming months and years.
I'm not a fan of marijuana (I'm more a beer or whiskey type of guy) but this e-letter is not the venue to discuss the relative merits or morality of recreational drug use. Suffice to say that I was at one time a university student, and like our President, I did inhale, because that's the point...
I've had many debates with my wife (a substance abuse counselor) on the dangers, or lack thereof, associated with chronic marijuana use - and at this point we've agreed to disagree. I'm of the mind that what you do in your home is your own business, so long as it does not impede my freedoms in any way. Smoking pot is surely bad for you, but so is watching TV, eating red meat and smoking cigars, but I see no reason to throw people in jail for those actions either.
God forbid someone gets it into their mind to outlaw knocking back a few Sierra Nevada Pale Ales or I'll become a criminal too.
Regardless of how you feel about the "devil's weed" it's going to become legal in the United States, and there will be profit potential. And the potential is huge. According to a Time Magazine article, 54% of Americans have tried marijuana. Ironically enough, that's the exact percentage of Americans that vote - so there's clearly some cross over.
I'm not suggesting that you should employ your green thumbs to actually grow the stuff - but I do think we can expect certain sectors, and a few specific companies, to benefit from decriminalization.
So let's drop in, tune in, and turn on our thinking caps to figure out what those companies might be.
I foresee two types of marijuana cultivation starting to happen.
Large scale marijuana and hemp farms
Home grown operations.
Large scale farming operations always need two things: fertilizer and tractors. I'll avoid recommending the two leading tractor companies Deere (NYSE: DE) and Caterpillar (NYSE: CAT) just because Caterpillar recently announced positive earnings and both companies' stocks just jumped. I do like these companies, just not at current valuations.
The small operations need fertilizer, but they also need smaller-scale equipment.
The world's largest fertilizer company is Mosaic Co. (NYSE: MOS). I like this company because they have a track record of solid profits, they have very little debt, and buying them today isn't just a bet that Americans will keep using marijuana. It's a bet that the world will continue eating more food as well.
It's a great time to buy this company. It's selling near 52 week lows, and fertilizer is still one of those sectors that is largely unloved by the broad market. When mom and pop start seeing their grocery bills go higher, and junior starts buying sacks of nitrogen for his closet grow operation, Mosaic will be pocketing the profits.
I love this company under $45 (the 50 day moving average), but I think it's safe to nibble under $54 (the 200 day moving average). Buying blue chips under their moving averages is a simple and safe strategy to make sure you're getting a relatively inexpensive entry point.
I've been perusing this website and looking at all of the necessary tools and equipment necessary for growing marijuana at home - and it's pretty clear that an in-house grow operation requires lots of specialized electronics, fans, lights, switches, batteries, tubing, pumps, thermometers, etc.
You can get just about everything you'd need with one trip to one of my favorite brick-and-mortar stores: Radio Shack (NYSE: RSH).
Radio Shack is one of those companies that will always be around - and it does nothing but book solid profits, quarter after quarter. While many other types of retailers have struggled to compete with online vendors, Radio Shack will continue to survive because most of us don't, can't or won't wait for a 5-7 day delivery period when we need a specialized light bulb or remote control or replacement battery. This company is boring but it's reliable. And pretty soon Radio Shack will be filled with neophyte homegrowers who aren't worried about getting busted anymore.
Right now Radio Shack is selling for around $20 a share - exactly what it was selling for in 1997. It has an attractive PE that's below 12 right now. It's only a $2.5 billion company, but it has over 4,000 retail locations in the United States. The company was founded in 1899, and it pays a modest dividend of 1.2%. I like this company under $20 a share.
If you believe that pot growers both big and small will come out of the woodwork in the coming months and years, these two companies are a great way to profit from the trend.
Good investing,
Kevin McElroy
Editor
Resource Prospector
P.S. I don't pay a ton of attention to IPOs, but my boss Ian Wyatt just put together a free report about how to successfully invest in IPOs. I've arranged for you to access this free report called "The Dos and Don't's of IPO Investing." All you have to do is CLICK HERE to get your copy.
And there's reason to be excited about IPOs...
The IPO market has been heating up this year. During the first two quarters of 2010 already 66 companies have gone public compared to only 14 in the first two quarters of 2009. Taking a good look at the graphic below it becomes apparent that the IPO market in late 2008 and early 2009 was dismal. Little surprise there. But notice the nice uptick since then.
