A Closer Look at a Budding Industry

04/07/2014 7:00 am EST

Focus: STOCKS

Alan Brochstein has been one of the first analysts to cover the sector in-depth, and recently, he shared his valuable outlook on this promising industry with the staff at Benzinga.

“How do you connect real smart people in other industries into this one? It’s gonna be another big growth driver and we need that,” industry analyst Alan Brochstein told Benzinga. “There’s no ‘Made In China’ when it comes to marijuana.”

While China (FXI) can cash in big-time in its own way, the US shouldn’t fall behind. According to the International Business Times, Colorado estimates its total recreational and medical marijuana sales will top $600 million in the next fiscal year.

The 420 Investor said he has not paid too much attention to the revenues numbers, since it’s so early in the game and many marijuana growers were not approved in time for the Jan. 1 launch. Brochstein said pent-up demand could make those numbers go higher, while constrained supply could see them drop.

“People like to watch these metrics, but there’s more going on,” Brochstein said. “The public companies are going to be key, not for consumption but for build out.” He was referring to the building of facilities in Canada and the US, as well as the continued adoption of medical and recreational marijuana in the states.

This expansion would also lead to additional jobs, and with unemployment a constant issue in the US, this could help plenty of citizens getting back to work. A recent CannaSearch job fair in Colorado brought together 15 private companies and about 1,200 people. Brochstein heard there was a 3-1/2-hour wait for some attendees.

“It’s creating a new economy. And this was just in Colorado, which has been a pot smoking state for pretty long,” said Brocshtein. “What the heck is gonna happen with Massachusetts?”

Brochstein said it would create jobs such as a “budtender,” a person who assists consumers like a waiter or car salesman might. Facilities would also need people to work the sales counter and general service areas, as well as the physical growing of marijuana plants.

The journalism industry could potentially see a boost in coverage and reporters. The Denver Post added a newspaper section, and even a separate website that is run by the paper’s marijuana editor.

Brochstein said he wasn’t sure how many “great” jobs the industry could create, but that there is a lot of potential from the marketing side.

“There’s a good chance for companies with distribution and branding to make money,” said Brochstein. He said the industry at this point is very inefficient, mostly attributed to its general youth and immaturity as a business. Marijuana is also illegal under federal law, which means retail cannabis is almost strictly a cash business.

“The risk is if they’re a federal bank they could lose their charter,” said CNN Legal Analyst Paul Callan. “They could also be prosecuted under a variety of federal regulations that have to do with money laundering.”

NEXT PAGE: Brochstein's Thesis

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While the marijuana industry’s economic effect may not be tangibly felt for a while, its acceptance has reaped emotional benefits for some. Brochstein recently visited Colorado to check out various facilities, stores and products. He was joined by four people from Florida and New York.

“We went into a dispensary…these guys had tears in their eyes. Everyday users—consumers. They walked into stores and it was like it was life-changing.”

Brochstein will not be out there shorting Anheuser Busch Inbev (BUD) and the beverage companies, or anticipating the country turning into a “bunch of stoners.”

“The whole space has a market cap of between $12-14 billion, all these public companies added up,” he said. “In the scheme of things, that’s not a lot. Just one beverage company would be $30-40 billion—and that company has a lot of profits.”

Brochstein’s thesis remains that current users will now be able to acquire cannabis through “legal” channels. When asked how the change in this dynamic will affect the fundamentals of cannabis, specifically, the economics of “supply and demand,” he answered by giving his take on the dynamic of “public” versus “private” investment—and whether or not a new sector for the US economy is emerging.

“A lot of people see what’s going on and think there’s going to be more demand because its legal,” he noted. “There’s a demand for legal marijuana [compared to black market marijuana]. There’s companies out there that can help people be more productive in growing, and so you’re seeing the build-out that’s going to happen. Legal recreational marijuana creates the need for high-quality marijuana at an affordable, competitive price. On the black market, they didn’t care about being efficient…It’s not just about more people getting high.

Benzinga asked what investors should look for if they desire to invest in the sector. Brochstein says try to identify companies that are doing the “right thing.” In his view, “Everybody knows these stocks are expensive, there’s no way you can make the case. But nobody knows the future.”

One such example is mCig (MCIG).

MCIG started off with a $10 vape pen,” he said. “They almost envision themselves as being the Apple of the industry. CEO and founder Paul Rosenberg [is] strictly a businessman, he owns about half the stock. He then brought on some talent and gave them his stock to help the company. Why? Because he knows the stock is overvalued, but if you can [evolve a company] without diluting your shareholders, that’s what I mean by doing the right thing.”

One final tip from Brochstein for potential investors is to read the filings.

He emphasizes the “Three Ps: people, pecuniary, the plan. Does company have right capital structure? Or money to execute their plan? These are venture capital people—these are not mature companies. You need forward-looking people that can adapt to change and that are shareholder friendly.”

By the staff at Benzinga

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