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Legal Marijuana: How To Invest In Pot

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LEGAL MARIJUANA
Medical marijuana is packaged for sale in 1-gram packages at the Northwest Patient Resource Center medical marijuana dispensary, Wednesday, Nov. 7, 2012, in Seattle. After voters weighed in on election day, Colorado and Washington became the first states to allow possession of up to 1 oz. of legal pot for recreational use, but they are likely to face resistance from federal regulations. (AP Photo/Ted S. Warren) | AP

MarketWatch:

Mark Twain is said to have remarked that a gold rush is a good time to be in the pick and shovel business. Investors may be able to apply that same bit of wisdom to the growing number of U.S. states that have legalized pot.

Although federal law prohibits the sale or possession of marijuana, Massachusetts last week joined the ranks of states — 18 plus Washington, D.C. — that allow its use for people suffering from chronic illnesses like cancer, HIV/AIDS, multiple sclerosis and epilepsy. In Washington and Colorado, meanwhile, voters passed an initiative to allow pot for recreational use.

Those changes have kickstarted a small but fast-growing medical-marijuana industry, estimated to be worth about $1.7 billion as of 2011, according to See Change Strategy, an independent financial-analysis firm that specializes in new markets. In Colorado alone, sales topped $181 million in 2010, and the business employed 4,200 state-licensed workers, says Aaron Smith, executive director of the National Cannabis Industry Association, a nonprofit trade group that campaigns for marijuana’s federal legalization.

In addition to profiting itself from growing and selling marijuana, the industry benefits a slew of other businesses, such as insurers, lawyers and agricultural-equipment firms, experts say. “Call it the ‘green rush,’” says Derek Peterson, CEO of GrowOp Technology, an online retailer of hydroponics — products used in the cultivation of indoor plants — and a subsidiary of OTC stock Terra Tech. “The industry is expanding, and there are all kinds of investment opportunities.”

For regular investors looking to get in on the action — and without having to actually grow or sell drugs — there are several small-cap stocks that stand to gain from marijuana’s growing acceptance. Medbox, an OTC stock with a $45 million market cap, for example, sells its patented dispensing machines to licensed medical-marijuana dispensaries. The machines, which dispense set doses of the drug, after verifying patients’ identities via fingerprint, could potentially be used in ordinary drugstores too, says Medbox founder Vincent Mehdizadeh. Based in Hollywood, Calif., the company already has 130 machines in the field, and it expects to install an additional 40 in the next quarter. “The smart money is trying to help with compliance and transparency,” Mehdizadeh says.

Of course, investing in drugs the federal government still outlaws poses enormous risks to investors, says Sam Kamin, a law professor and the director of the Constitutional Rights & Remedies Program at the University of Denver. In fact, nearly 500 of the estimated 3,000 dispensaries nationwide have either been closed by the federal government or shut down in the past year, says a spokesman for StickyGuide.com, an online directory and review site for medical marijuana dispensaries — and yet another ancillary business that’s currently seeking investors.

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