Since the legalization of Marijuana in two states in the US, stocks such as Medbox Inc, have soared only to come crashing down. However, valuation levels are still high, is this a bubble?
A (nearly) freely available product has never before become a market commodity overnight. Something which was almost a non-entity to investors for a hundred years is suddenly one of the investment world’s most talked about commodities.
The legalization of Marijuana for recreational use in Washington and Colorado will be an interesting process for many reasons. It’s effects on the stock market, if we are to judge by recent event, will be particularly interesting.
In the weeks immediately following the legalization of marijuana in the two states, the stock price of Medbox Inc (PINK:MDBX) jumped over 3000%, sending its share price from around $6 to a high of $215, and its market cap from $5 million to more than $2 billion.
The jump happened in under a week, after Medbox Inc (PINK:MDBX) was mentioned by both the Wall Street Journal and Marketwatch.com as a possible proxy investment for marijuana. The rise was clearly unjustified, and the company’s stock has since fallen. Today it is trading at around $61. Yet, the valuation at 12,200x book (according to Yahoo finance), is extremely high.
The whole incident should call the market to question any marijuana based investment thesis. Just one month ago, the concept of a “marijuana based investment thesis” would have been considered a very bad idea indeed.
The market is excited, and justifiably so, because a commodity has just come on the market which is guaranteed to make some people a great deal of money. The demand is there, that much is patent. The question is, which companies will succeed in the market? Medbox Inc (PINK:MDBX) specializes in making marijuana vending machines. That’s not the most lucrative part of the weed business.
Neither of the States which have legalized marijuana have put in place a framework for it to work on a commercial level. The amendments require that they do so within fixed time periods. There are supply issues and taxation issues to consider before even contemplating marijuana investment.
There are several companies, apart from Medbox Inc (PINK:MDBX), which might be considered for a marijuana play. Converted Organics Inc. (PINK:COIN) and GreenGro Technologies, Inc. (PINK:GRNH) both sell products used in industrial production of marijuana.
Those are surely more probably successes than marijuana vending machines. It is still a rarity in most countries to see alcoholic beverages in public vending machines. Hard alcohol, which marijuana is more likely to be regulated in line with, is almost never seen in such machines.
Established brands may be a good play in the legal marijuana industry. Edible marijuana infused goods could be produced by major snack food companies. No major brand has yet made a declaration of any such intention, though it is one to watch.
The company has not, like the other major brands, announced anything in line with the rumors, but adding a completely new product line to what many assume is a company in a dying industry may be a good play for the firm.
There are obvious PR penalties for associating one’s brand with marijuana legalization, but something suggests that tobacco companies would be immune to most of the backlash.
The legalized marijuana industry is a very very young one. There is no telling how many firms will rise and fall before the major players in the sector are firmly established. Investing in the industry is high risk, no investor should believe otherwise.
A play across firms involved in the sector may be the wisest move, but such a spread reduces the payoff, as is the case with any industry. A marijuana based ETF is surely being prepared by at least one of the large ETF purveyors. It will, no doubt, be popular among those who sought to capitalize on the Medbox Inc (PINK:MDBX) surge, or at least those who have not learned their lesson.
Though there is undoubtedly huge demand for marijuana, and there will be a legal market for it, it is impossible to tell what shape that market will take. Before that is known, investing in any of the sector’s stocks is a gambit.
This all begs the question, are Marijuana stocks the next bubble, or has the bubble already burst?