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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