Marijuana is transitioning from counter-cultural act of youthful rebellion to mainstream capitalism. It’s still outlawed at the federal level, but increasing numbers of states are legalizing Mary Jane for medicinal as well as recreational use.
The result has been a “green rush” of investors and venture capitalists eager to reap profits from the rise of canna-businesses.
But now, analysts fear a snag. The surprise electoral college win of Donald Trump has prompted scores of marijuana investors to flock for the exits, as the president’s new U.S. Attorney General, Jefferson “Jeff” Beauregard Sessions, declares war on marijuana normalization.
The former GOP senator from Alabama and now the nation’s top law enforcement official even said that he thought the Ku Klux Klan “was OK until I found out they smoked pot.” (Sessions now claims he was joking, but his political intention remains clear.)
Here’s a pot stock that should prove immune to these adverse political winds emanating from the nation’s capital: 22Nd Cntry (NYSE:XXII), a small-cap biotech that bioengineers marijuana as well as tobacco plants for end uses that are perceived as socially valuable.
22nd Century is a fast-rising plant biotechnology company that specializes on tobacco harm reduction and cannabis research. With a modest market valuation of $125 million, 22nd Century Group is a relatively stable play on a volatile industry that’s rife with thinly capitalized start-ups and entrepreneurs who possess scant business savvy.
22nd Century’s THC-free marijuana is in demand among farmers, medical scientists, and agricultural programs across the U.S. The company’s seasoned researchers are now creating “enabling tools” that expedite the focused bioengineering of cannabinoid production in the cannabis plant, with the aim of creating new strains of industrial hemp plants with reduced levels of cannabinoids for new drug treatments and agricultural applications.
Among the company’s key initiatives is the development of a new strain of hemp containing zero THC, the main psychoactive compound found in cannabis. THC produces the “high” in the brain that earns marijuana its federal ban as well as lasting enmity from the attorney general.
The biotech firm also is genetically engineering tobacco plants to contain 97% less nicotine than conventional strains, as well as a strain high in nicotine that provides the lowest tar-to-nicotine ratio in the cigarette industry. Either option would help smokers kick the highly addictive and destructive nicotine habit.
The marijuana industry’s mostly smaller players tend to be burdened with onerous debt and poor (or nonexistent) earnings growth. 22nd Century, however, boasts the financial wherewithal and earnings momentum that should help it weather the sector’s inevitable shakeout.
The company sports a low total debt-to-equity ratio (most recent quarter) of 1.26. The average analyst expectation is that 22nd Century’s year-over-year earnings growth will reach 25% in the current quarter, 25% next quarter, 33.3% this year, and 10% next year.
What’s more, investor concerns that Sessions will initiate a new era of marijuana prohibition are overblown. States that have legalized or at least loosened restrictions on marijuana are increasingly dependent on the tax revenue, which is proving a bonanza for many cash-strapped fiscal coffers.
The marijuana industry enjoys several tailwinds, especially as doctors try to grapple with the deadly opiod addiction epidemic and search for pain-killing alternatives.
According to a 2017 annual report recently released by New Frontier Data, a cannabis market research firm, the marijuana industry in the U.S. is on track to generate $24.5 billion in sales by 2025, with a compound annual growth rate of 16%, and employ more than 255,000 within three years.
Not even the social conservatives that control both chambers of Congress and the White House are likely to impede the marijuana industry’s accelerating growth. Despite the tough-sounding rhetoric from the flinty southern-bred Jeff Sessions, at the end of the day the Trump administration is pro-business.
John Persinos is managing editor at Personal Finance. At the time of publication, he owned none of the stocks mentioned.