Should You Add Marijuana Stocks to Your Portfolio?

As some US states have migrated toward the legalization of marijuana, most have failed to appreciate the potential economic and societal benefits that this legislature would provide. Over 500 economists signed a letter to governmental bodies citing the likely benefits of marijuana legalization.

From an economic standpoint, marijuana legalization would save $7.7 billion per year in funds spent on prohibition enforcement, and it would also generate about $6 billion in tax revenue each year. Not only does the legalization of marijuana make sense quantitatively, but the new industry that has emerged could create many new jobs and open up a whole new market for consumers to spend and boost the economy.

While opposition to its legalization argue that it would encourage moral decay throughout society, it has been argued that marijuana-related crimes would decrease and subsequently, drug-related arrests would decline as well.

Currently, there are 15 states that have enacted legislature legalizing marijuana. This is only the beginning to what may become a new and profitable industry. Consequently, investors have an interesting opportunity to consider.

Much like the technology bubble in which there was an influx of tech-related stocks that eventually crashed and burned, investors must use due diligence to choose marijuana-related stocks with the best chance of surviving and earning competitive returns. Consider the stock, Medical Marijuana. Medical Marijuana helped other organizations maintain rules compliance as well as manage legal and tax obligations. However, this company now trades over the country at $0.04 down from a high of $0.64 in mid-2009. This is a great example of how quickly companies can fail in new markets.

To hedge risk in the marijuana market, investors might consider investing in a company that's products and services are further-reaching than just the marijuana market. For example, consider Valeant Pharmaceuticals International (VRX). This company struggled in 2010 with much higher operating costs than 2009 and profit was unable to keep pace resulting in a negative net income for the year. Valeant develops, manufactures, and markets many pharmaceutical products in neurology and dermatology. However, it also makes Nabilone, a form of synthetic THC, which may be the key in the emerging market of marijuana. Like many pharmaceuticals, Valeant may be a risky bet as it had a -17.63 profit margin in 2010.

While there are few marijuana-related stocks that are both actively exchange-traded and possess quality financials, it may be a good idea for investors to keep close watch on the legal developments in order to capitalize on the growth of this market