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2015/04/29

Time to Buy!

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Time to Buy!
By Jeff Siegel | Wednesday, April 29th, 2015
Jeff Siegel

You want to make friends or do you want to make money?

This is what a colleague of mine asked me in 2010 when I recommended Whole Foods (NASDAQ: WFM) as a strong buy — not long after the market collapsed in 2009.

Readers and fellow analysts criticized, heckled, and mocked me for that one.

My favorite comment that I’ll remember for the rest of my life was, “See ya in the poor house, hippie!”

My response just a few years later...

WWFM

In 2006, when I recommended First Solar (NASDAQ: FSLR) as an excellent way to play the burgeoning solar market, the criticisms were even more pronounced — some even violently hostile.

My response...

ffsrl

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Since first providing coverage of “green markets” for investors, I’ve had to deal with an enormous amount of condescending pessimists and incredibly arrogant skeptics. And while none of that would bother me today, it did back then.

That being said, I suppose my skin has grown thicker over the years — mostly due to the fact that my success in renewable energy and organic foods has been the best form of vindication anyone can ask for.

Of course, I’m always looking for the next big growth story. After all, while there’s still a boatload of cash to be made in renewable energy and organic foods, those industries are much more mature now. They’re no longer controversial (for the most part), and ground-floor opportunities are harder and harder to come by.

Thankfully, I’ve discovered a new opportunity that is not only controversial, but in some cases, it’s actually illegal. Yet I’ve still figured out how to make a profit from it — and do so without going to prison.

The Largest Cash Crop in the United States

I actually started climbing down the research rabbit hole on this one about two years ago.

During that relatively small window of time, this market enjoyed a rapid boom and bust cycle, mostly perpetrated by pump-n-dump penny stock hustlers, a handful of state-based legislative initiatives, and a small but eager market of very inexperienced investors.

And let me be perfectly clear: This market — at least at this time — is still incredibly risky. However, the potential rewards are mind-blowing.

At this very moment, the estimated market value of this industry exceeds that of corn and wheat. In fact, it’s considered to be the largest cash crop in the United States, enjoying a growth rate of 77% from 2013 to 2014 and an estimated 700% growth rate by 2018.

And folks, this is just in the United States, and it doesn’t actually take into account all the picks and shovels plays that have hitched a ride on what I believe will prove to be one of the most profitable commodities plays in the world — bigger than corn, bigger than cotton, bigger than wheat.

I’m talking about marijuana, and I can tell you that in my 21 years in this business, I’ve only seen five investment trends with this much profit potential:

  1. The Internet
  2. Biotech
  3. Renewable energy
  4. Organic foods
  5. U.S. shale/fracking
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The Best Time to Buy

Now here’s the good part...

The marijuana industry is looked upon as a leper. It’s been painted with broad strokes of disinformation, bureaucratic buffoonery, and a serious image problem.

So why is this the good part?

Because nothing screams opportunity more than a profitable industry that most investors are afraid of. Especially in this case, where there is proven value on a massive scale.

Of course, it won’t be this way forever. Eventually, much in the way we saw with the U.S. fracking boom, the renewable energy boom, and the Internet boom, skepticism will quickly be replaced by enthusiasm, trend-chasing, and profits.

I give it about three years. By that time, most of the big-money, ground-floor opportunities will be gone. And that’s why I’m staking my claim now, while the herd continues to cower in the corner under the shadow of all things that “could” go wrong.

Again, that’s the best time to buy... if you have the stones.

High Risk, High Reward

There’s no doubt about it: Investing in the marijuana space is very risky. And not just because in the eyes of the federal government, marijuana is still a schedule 1 substance and subject to federal laws regarding schedule 1 substances...

Except as specifically authorized, it is illegal for any person:

1.) to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance; or
2.) to create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance

This alone is enough to scare off most investors. But there’s more...

As the good folks over at Viridian Capital pointed out in their 2014 Review and 2015 Outlook:

The industry is undergoing a shakeout on a very fundamental basis due to the early stage nature of the industry and the lack of executive experience. Key industry/company challenges we observe, include:

  • Core business fundamentals are still evolving - business models, pricing, budgeting/forecasting, management/board depth, operations skill - creating execution risk.
  • Poor balance sheets and toxic financing structures are pressuring stock prices and hurting companies’ ability to raise capital. We expect a number of public companies to delist.
  • Federal legal status continues to act as an overhang, impeding the rollout of commercial banking in the industry and causing the subsequent negative effects on commercial operators.
  • Cannabis pricing is under pressure, the supply and demand curve is variable by state, and illegally grown marijuana is still penetrating the system, leading to slower rollouts by states.

If you haven’t left by now, either you love the excitement of a high-risk/high-reward investment opportunity or you’re a glutton for punishment. I hope it’s the former.

Of course, it’s not all doom and gloom. As Viridian also notes in its outlook:

We still remain very bullish on the industry and believe that there is a core, and sustainable, investment rationale for operators and investors, including:

  • Colorado generated nearly $700 million in marijuana revenues in 2014, as the first state to launch recreational marijuana sales. This is a powerful incentive for other states to act.
  • Oregon and Alaska have legalized recreational marijuana. We expect seven to thirteen states, most notably California, to introduce legalization initiatives in 2015 and placement on ballots in 2016.
  • Positive federal initiatives in 2014: Supreme Court recognizes States’ rights to regulate marijuana; Congress bans government from interfering with the state medical marijuana laws.
  • M&A activity increases among existing companies, and through the emergence of strategic acquirers, in a chase for early market share/brand leadership, propping up valuations.
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Here’s the bottom line on marijuana...

The legal marijuana market is now in the earliest stages of development. This means there will be a lot of bad deals, bad stocks, and bad investments.

In fact, I would argue that at least 80% of the public companies in this space today will no longer be in existence by 2018. And that’s being generous.

But I don’t care about those. The only things I’m interested in are the early-stage players we see today that have the funding, the management, and the drive to become the billion-dollar behemoths tomorrow.

To equate this to the alternative energy space, I’m talking about the biggest disruptors on the block — companies like Tesla (NASDAQ: TSLA), SolarCity (NASDAQ: SCTY), and First Solar (NASDAQ: FSLR).

To equate this to the Internet, I’m talking about companies like Google (NASDAQ: GOOG), Facebook (NASDAQ: FB), and Amazon (NASDAQ: AMZN).

If the cannabis industry were the oil industry, we’re looking at the emergence of the next ExxonMobil (NYSE: XOM). If it were an organic food retailer, we’re looking at the next Whole Foods. If it were a biotech company, we’re looking at the next Amgen (NASDAQ: AMGN)

I think you get my point.

Of course, none of this information is of much value if you can’t profit from it. So that’s why I’m currently writing a special report on how to profit from the burgeoning marijuana market.

The report includes both public companies (including tickers) and private companies that are likely to go public.

I hope to have the report ready by the end of May. If you’d like to get access to the first edition, click here now.

To a new way of life and a new generation of wealth...

Jeff Siegel Signature

Jeff Siegel

follow basic@JeffSiegel on Twitter

Jeff is the managing editor of Energy and Capital and contributing analyst for the Energy Investor, an independent investment research service focusing primarily on stocks in the oil & gas, modern energy and infrastructure markets.  He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.

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