Not High on Marijuana Stocks

The marijuana industry is starting to shape up as legalization keeps gaining speed in the United States and Canada. Right now, Canada, with nationwide legalization, will look to be the litmus test in terms of publicly traded companies with truly nationwide reach. The United States is quite a bit more fragmented as states have pursued legalization independent of the federal government's authority.

In terms of the United States - here's what I'm seeing:

• Alcohol and Tobacco companies will plant a foot in the market. While there has been a lot of news about marijuana-infused drinks coming out I believe the greater opportunity is in distribution. Large tobacco and alcohol businesses have a significant advantage in operating in multi-state distribution of highly regulated products. The downside I see is that these larger businesses may be slow to enter, giving room for smaller distributors to learn to adapt to multiple regulatory environments. If this is the case, these smaller distributors become acquisition targets.
• Independent stores or chains may arise and go public - but I don't see them becoming quite as successful as distribution if nationwide legalization is achieved. There may be short-term gains to be had so long as the market is fragmented. Without inter-state commerce, retailers must source product within the state meaning prices are constrained. The irony in this is that prices in the wholesale market, specifically with Colorado and Oregon in mind, have been falling quite a bit. Colorado prices, as shown in the link, have fallen 37% in a little over 3 years. Inter-state commerce will further this trend as farming can move to even more-competitive locations.
  
  But ultimately, as it stands today, you're buying into a single niche retailer in an increasingly competitive market. One thing to keep an eye on will be license approvals. If licenses continue to increase, there will be more competitive pressure ensuring the continued drop in pricing.
• With legalization comes risk that, eventually, international trade in the commodity may arise. You may start finding legal trade with Mexico or another national producer see further competitive pressure on the production side of things.

Those are, at least currently, my thoughts on the Marijuana market. Be sure to check out the Forbes link I found while writing this as it appears to convey similar sentiments.