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Pot Stocks Offer No Contact High for Big Tobacco

Stocks in this article: MDBX MO PM RAI ENRT

NEW YORK (TheStreet) -- The legal marijuana movement has lit a fire under lots of iffy companies with pot-related business prospects, but big tobacco stocks aren't joining the party.

Shares of companies with pretty much any marijuana-related business, or even stated plans to enter a marijuana-related business, have shown huge share price gains over the past few months in the euphoria leading up to and following pot legalization in Colorado and Washington.

Take Medbox (MDBX), for example. Shares have nearly quadrupled in the past month, despite a host of accounting and legal red flags and its inability to earn a profit for at least two straight years.

Then there's the case of a tiny company called Enertopia, (ENRT) which was supposedly in the renewable energy business. It has just two employees and no revenue at all for either 2012 or 2013. Its shares didn't move from the two cent mark for 14 straight days, and they only traded on two of those days.

On Nov. 4, however, Enertopia announced a letter of intent to acquire a 51% stake in a medical marijuana business, and shares jumped to 5 cents on volumes of more than 200,000 shares -- roughly equivalent to the previous six weeks of trading activity.

Since that announcement, Enertopia shares have had 15 trading days with volumes above the 200,000 mark, including on Jan. 9, when more than 1.2 million shares changed hands. The share price was at 16 cents late Thursday morning.

FINRA, a securities industry self-regulatory organization, lately issued a warning about marijuana-related companies. Its stated goal was "to warn investors not only about the potential for fraud in this arena, but also to reiterate the risks of investing in thinly traded companies about which little is known."

Given the iffy status of these marijuana-related companies, you'd think investors might look instead to well-oiled marketing machines like Philip Morris (PM)Reynolds American (RAI), and Altria (MO). All of those companies have underperformed the S&P over the past 12 months, and given the dramatic declines in cigarette consumption, as well as signs the product has lately become vulnerable to pricing concerns, it's easy to see why.

There has been plenty of media speculation that big tobacco may enter the pot business, but so far Philip Morris, Reynolds American, and Altria have given no indication they will do so.

When asked by the Associated Press, a Philip Morris spokesman appeared to leave at least a partial window open, stating merely that it has "a practice of not commenting or speculating on future business." A Reynolds American spokesman said the company has "no plans to produce or market marijuana products" in Washington or Colorado," adding "it's not part of our strategy."

But strategies can change.

Marijuana doesn't appear to have come up in recent communications by the big three tobacco companies with their investors. A search of Securities and Exchange Commission filings for Philip Morris, Altria and Reynolds American over the past four years under the keyword "marijuana" produced no results.

I also searched the latest earnings call transcripts for Altria, Philip Morris and Reynolds, and, again, neither marijuana or pot showed up in a keyword search. I also emailed 12 analysts who cover Altria to raise the question. Only two responded, and both declined to comment, stating that they hadn't written about the subject and so didn't feel comfortable giving an interview.

OK, so we could be a long way from big tobacco selling pot. Still, at least there's a real business at the cigarette companies, run by people with a long track record of delivering value for shareholders. Even if the big tobacco companies never enter the pot business, the downside risk would appear to be somewhat contained. With companies like Medbox or Enertopia, on the other hand, your investment could disappear in a puff of smoke.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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