Marijuana Legalization: 3 Legit Angles to Profit From Decriminalized Pot

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Earlier this month, voters in Washington state and Colorado fired up Election 2012 coverage when, in addition to picking a president, they also voted to legalize possession of small amounts of marijuana for personal use. War-on-drug advocates are tripping out. But marijuana advocates are flying high.
Apologies for the gratuitous weed wit, but we assumed someone put out a mandate to the press to get cheeky when reporting on this issue. Talking about pot legalization, America's news anchors can't seem to get through a sentence without breaking out with a case of the giggles.

But this is a serious issue -- and presents investors with a serious chance to profit from the sea change in America's drug laws.

In essence, by legalizing the sale and use of marijuana, the states of Colorado and Washington have essentially created an entirely new market for goods -- a legal market that will start at zero, and post literally exponential sales growth for years, until it reaches some kind of equilibrium. (Assuming, of course, the FBI and DEA stand aside -- technically, at least, marijuana possession is still a federal crime.)

How large is the pot market today, and how big might it become?

Because few pot dealers file income tax returns on their business -- and even fewer pot smokers pay sales tax on the stuff -- accurate estimates are hard to come by. A 2010 study conducted by CNBC, however, suggested that the marijuana market in America is probably in the range of $40 billion a year, with the potential to grow to $100 billion in the event of widespread legalization.

Thus, it's smaller than the market for other legal mind-altering substances such as beer ($99 billion), tobacco ($71 billion), or hard liquor ($61 billion) -- but bigger than the market for wine ($27 billion).

Granted, legalization would remove the "crime premium" built into pot prices, as producers would no longer be able to charge extra to compensate for taking on the risk of incarceration. But if you think states wouldn't quickly step in to make up the difference with taxes, you're probably using something harder than marijuana. CNBC estimates that if Americans spent $40 billion buying marijuana, states would probably load on another $16 billion to $20 billion in taxes.

Now what does a market this big mean to you, the investor?

Quit kidding around. Want in on the action?
Forget about all the jokers telling you that now's the time to pick up shares of PepsiCo (PEP) and Yum! Brands (YUM), anticipating hordes of teenagers with the munchies chowing down on Cheetos and making midnight runs to Taco Bell.

Sure, it's possible that junk food will get a small boost from greater marijuana use. But that's a corollary play on the trend at best. There are much more direct beneficiaries to marijuana legalization. Today, let's just look at the 3 Ps:

Paraphernalia: Smoking weed out of a crushed can of Milwaukee's Best is so 1990s. In today's legal pot world, well-heeled tokers are more likely to advertise their hipness with the latest in marijuana tech. They'll be shopping for bongs and pipes -- probably initially on websites like Craigslist and eBay (EBAY). But as the trend gains traction, and fears of repeal and punishment fade, you could see larger retailers such as Amazon.com (AMZN) and even CVS (CVS) get into the marijuana paraphernalia trade.

Payment: Today's marijuana market is basically cash and carry. But as the market develops, you can bet major financial actors will want to get in on the action. An investment in eBay, therefore, could actually offer a secondary play on this phenomenon if pot shoppers turn to PayPal to pay for their purchases. (eBay owns PayPal, you see).

And for customers who aren't motivated enough to hit the ATM before making their purchase, what better way to pay for your drugs quickly and easily than by putting your pot purchase on plastic? Chances are, right now MasterCard (MA) and Visa (V) are plotting their entry into the market for legal marijuana transactions.

Pariahs: As smoking marijuana has gained popularity in America, smoking of another demon weed -- tobacco -- has lost it. That's been bad news for cigarette makers like Reynolds American (RAI) and Altria (MO), but marijuana legalization may offer these companies a second chance at a bright future, and the possibility to revoke their pariah status, and become "cool" again.
For its part, Reynolds is officially on record saying "We're not in the trade of selling marijuana, nor will we ever be." (Of course, that was before Nov. 6.) Altria, meanwhile, left the possibility open: "We never speculate on what our future plans may or may not be."

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of MasterCard, Amazon.com, and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, Amazon.com, Visa, and eBay.

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Financial Profitude

I've started an MMJ business. Anyone who wants to starts an LEGAL MMJ Business.We are Seeking individuals OR partnerships who would like funding to start their own LEGAL Medical Marijuana business who have experience. Will only take 25 applicants in the next 60 days. Serious Inquiries only.Email me @ infogogreenmmj@nokiamail (dot) com

January 23 2013 at 8:41 PM Report abuse rate up rate down Reply
politicalpizza

Baseball - Apple Pie - and a Marlboro Green

We aren't quite there yet...but that day will
be here faster than you will learn to roll a joint.

Ever since we received the Ten Commandments we
have never been very good at prohibiting people's
behavior...but very good at restricting and regulating
the consequences.

But when the consequences hurt society more than the
individual...than we usually get around to modifying the
commandments.

With more than 1 million people in American Prisons related
to drug crimes (many of them related to Marijuana), certain
border towns with murder becoming more popular than dinner
and a movie and many cancer patients being denied a degree of pain
relief because they don't know how to drive to the "hood" and shop
for a good local drug dealer...the time to change our approach to
marijuana has probably finally come.

Sodomy laws didn't get rid of homosexuality, Prohibition certainly
didn't stop drinking, the Scarlett letter didn't stop adultery and last I
checked prostitution was still a pretty vibrant business (thank you craigslist).

Why don't we get ahead of the curve on this one and stop trying to prohibit
and learn to restrict and regulate with all the common sense protections that
a society needs to balance between a limited government and freedom.

We learned to sell a warning pack with cigarettes...maybe we can learn to
have a joint and a smile!

November 20 2012 at 2:05 PM Report abuse rate up rate down Reply
1 reply to politicalpizza's comment
freethedems2012

A sin tax?

November 26 2012 at 4:48 PM Report abuse +1 rate up rate down Reply
stvhndyman

I don't think "smart" people would use a credit card to purchase weed. It leaves a trail of what, and how much, you are purchasing. Much like cell phones leave a trail of who you are calling, when you call, and where you call from.
But this applies only to "smart" people!

November 20 2012 at 5:37 AM Report abuse rate up rate down Reply
Danny

Laws are the result of who you voted into the office that decides what you can do. If enough people want to smoke pot they vote for people that will change the law like the pst election in Colorado. Its just that simple. I have never messed with it so it dosen't bother me one way or the other.

November 20 2012 at 5:31 AM Report abuse rate up rate down Reply
1 reply to Danny's comment
freethedems2012

.......until you get hit by a high driver.

November 25 2012 at 2:00 PM Report abuse +1 rate up rate down Reply
Adele

Hate to break the news to you Rick but there will be no getting into the payment side of this industry by PayPal, Visa, MasterCard etc.. or anyone else for that matter until marijuana is legalized on a federal level. If anyone is wondering how I could know this and what could possibly make me an "expert " I totally understand. First off I am a "Merchant Services" or "Credit Card Processing" expert with over 12 years in the industry specifically the last 5 being on the Executive level at two of the largest processors in the world. Secondly at one point my sales teams were responsible for setting up 75% of all MMJ clinics in the country with their credit card processing. That is until we received a letter threatening that the RICO law would be used against us on a Federal level.

The problem in a nut shell is that during the life cycle of a credit card transaction, the funds leave state lines almost immediately in order to be processed by the card issuer (Wells Fargo, United Airline, Citi Bank) as well as the association i.e. Visa, MasterCard etc but then the transaction also must clear the Automated Clearing House. So unless these laws are passed on a Federal level, by using a credit card to make the transaction you are effectively participating in trafficking "drug" money across state lines and into states where marijuana is not legal, even if only for less than one second. I know of few MMJ clinics here in Denver who have been able to skirt this issue by having their business's industry type inaccurately represented on their processing application but these are usually found out and shut down in very short order.

I’d have to imagine that big tobacco see’s a very similar problem. In order for them to participate they would have to start manufacturing, marketing and distribution in the state where it is legal and only in that state. In addition why would big tobacco go into an industry they KNOW the Federal Government is opposed to when they spend millions of dollars a year to keep grotesque pictures off of packs of cigarettes which are very common in many countries as well as trying to keep a Federal “health” tax off of their product so that ciggs are not $10 a pack everywhere like they are in NY? My opinion is that Big Tobacco has much more to lose by pissing off the Feds then they do to gain until these laws start to pass either from coast to coast or at the Federal level.

November 20 2012 at 1:58 AM Report abuse +1 rate up rate down Reply
whoisdisstresed

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CONSIDER THIS.....In some states, such as TEXAS.....you can be charged with a felony for possession of even two joints worth of pot. OK...so now you have a felony record....you may or may not go to jail depending on let's say if the judge in Texas is pissed off that the COWBOYS didnt win....but in the very least....a FELONY record makes it quite difficult to get a decent paying job...if a job at all. NOW WHAT..? NO job....means PUBLIC assistance and we all know how the real slick Reich Wingers dont want to legalize pot because we may all turn into Charles Manson's...but in not doing so.....they've created an entirely new catagory of why people turn to being "kept" by the Federal and state Govts. Can't have it both ways kiddies......either legalize it......decriminalize it....or STFU when someone cant find a job due to a felony conviction for a small amount of weed then has to go on public assistance.
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November 20 2012 at 12:43 AM Report abuse rate up rate down Reply
kendelvalle

A message for conservatives against State legalization of pot: "State's Rights"

November 19 2012 at 9:57 PM Report abuse rate up rate down Reply
SNICKLE MAN 49

yes on obama now legalize pot

November 19 2012 at 9:56 PM Report abuse rate up rate down Reply
bensintbictalin

War on drugs...how funny. IF there was an ACTUAL war on drugs being waged by the strongest power on the planet, I think our drug problem would be considerably smaller. Let's face it, kids, there is no war on drugs, only a show of stopping the stupid carriers. IF there was a war on drugs, then poppy fields would be getting bombed and drug producers assassinated with smart bombs. If we can put a missile through a window of a barracks, we can take out Sancho's villa in Columbia easily enough. This country couldn't stop consumption of alcohol--indeed, some of the greatest fortunes came from bootlegging--so why waste taxpayer dollars and valuable resources if we're not going to go all the way? Stop the drugs? Kill the producers and the bankers that launder their money. Otherwise, let the pot be legal, tax it, regulate it, just like we do the cigarettes. It stopped a lot of violent crime when prohibition was lifted. Do the math.

November 19 2012 at 8:40 PM Report abuse rate up rate down Reply
umfan4u

Here is something to think about people die every day from drinking, smoking cigerettes, but yet I have never heard of a medical examiner putting on the autopsy report that this person died from weed. All the people who say it is a gateway drug u are stupid i know people and my self for that matter who have smoked pot for years and have never tried any other drug. And for everyone that says it would be easy for kids to use it well then i guess if u care like u say u do then u would have to ban drinking, cigerettes, and pain pills cause right now kids can get their hands on those items very easy I could say for sure id rather someone smokes a joint and gets a buzz then snort a pill and overdose and die or drink them selves to death. Not to mention how much money states and the federal gov would save after all how much do u think it cost for that helicopter to fly around everyday looking for plants then they will say oh wow we found plants worth 2 million dollars on the street news flash that doesnt stop it or slow it down at all so after all u have to admit the actions against pot right now is pretty much like trying to put a wildfire with cups of water.

November 19 2012 at 8:39 PM Report abuse +1 rate up rate down Reply