Marijuana May Soon Be Legal. Altria and Lorillard Could Explode to Upside
If you have been watching the news this week you will see there is going to be a vote to legalize marijuana in Colorado. Two other states are also going to put this to vote as well. Washington State believes legalizing and taxing marijuana could bring the state almost $2 billion in taxes over the next five years or as little as zero. Colorado feels it would generate 100 million annually in tax revenue for their state.
Polls have shown that the majority of Americans support the legalization of marijuana. There is much support in these states and it seems to grow each year (no pun intended). I believe it is just a matter of time until all states vote to fully legalize the substance and tax it. It would be regulated same as alcohol is.
Other benefits to debt ridden states are reduction of burden on the courts and jails. Jobs will be created. Money would be saved reducing the efforts required to battle marijuana in the drug war. These savings are both on the federal and state levels. The federal government would save an estimated $13.7 billion annually if pot were legalized according to recent reports. This is big business folks.
Once marijuana is legalized I think we’ll see the leading tobacco companies come in to produce and distribute marijuana. They have deep pockets, expertise in growing a similar plant (tobacco), factories to package the product and the distribution channels to get it into stores. The small growers will be completely taken out by these juggernauts.
Domestically the companies to look for that can and will take advantage of this are Altria (NYSE: MO), Lorillard (NYSE: LO) and Reynolds American (NYSE: RAI).
I believe right now you can invest in these companies strictly on the basis of their tobacco businesses. You have a great dividend on them which historically has been very safe. Recently this sector has performed very well as investors chase yield. Tobacco stocks certainly have yield. These are well managed companies that continue to perform in low to no growth environments. They do this through cost cutting and price hikes.
Looking further I see the legalization of marijuana as one giant call option on this development. When it happens the pot industry will be measured in the billions and billions of dollars. These companies are all in the best position to jump all over this when it happens. The upside to revenues and earnings for these firms will be substantial as an entirely new revenue stream gets plugged in.
When will all this happen? I don’t know but it could be starting later this year in small doses if these states pass the laws. It will put pressure on the federal government to visit this issue and look to legalize marijuana on the federal level. It could be a year, maybe a few years or a decade but I’d estimate a 90% chance it will happen within ten years.
A great fool article by Alex Planes was published recently comparing Altria versus Lorillard based on various metrics. I won’t reiterate them here but if you are looking to research these companies it is worth a read so I’ve included the link below.
I personally am not a drinker or smoker of any kind. I know the purchase of some “sin” stocks is sometimes looked down upon but Jim Cramer has a good take on this. The money is the same in your bank account. It does not know if it came from tobacco or some other less sinful product. If you hate tobacco then take your profits and invest them in anti-tobacco campaigns. I invest to make money and generally believe adults can make their own choices of what to eat, smoke, drink or invest in. So if you like the flavor of these sin stocks and want in on a potentially huge catalyst that could supercharge returns take a look at these domestic tobacco plays. Once this happens the prices will no longer be so cheap as the market quickly will price it in.