Getting High (returns) With Colorado’s Legalization

I can’t think of any historical precedent for what’s happening with marijuana in the United States—when a formerly illegal substance with a massive built-in market becomes legal. Alcohol prohibition almost fits the bill, but alcohol was legal before prohibition. That being the case, it’s time to take a look at two pure play over-the-counter stocks that appear well-positioned to benefit from Colorado’s burgeoning marijuana industry: Fusion Pharm, Inc. (FSPM) and Endexx, Inc. (EDXC).

Fusion Pharm, Inc.

Based in Denver, Colorado, Fusion Pharm, Inc. manufactures and sells a patent pending commercial hydroponic cultivation system capable of growing almost any herb, vegetable, flower, fruit or terrestrial plant better and faster than traditional farming methods. The system is called the PharmPods hydroponic cultivation container system. The company sells and licenses its PharmPods containers to agricultural equipment distributers, urban farming companies and other specialty growers. In February 2013, the company completed the sale of 8 PharmPod High Intensity containers under its licensing agreement with Meadpoint Venture Partners.

Unlike almost all other issues in the “pot sector,” Fusion Pharm features a razor-thin float of 5.7 million shares. With the current mania for marijuana stocks in full swing last week and this week, traders managed to push FSPM up to an intraday top of $2.95 in Wednesday’s trading at the time of this writing—an extraordinary move considering that shares were available two weeks ago for about $0.25 – $0.30.

Of course, a significant part of the surge in FSPM’s share price can be attributed to momentum players circling their wagons around what has turned out to be a perfect storm of buying conditions in the sector. Reports out of Colorado of long lines to buy cannabis, and that the state’s marijuana dispensaries are already having difficulty keeping up with demand after only one week, have served to fuel buyers’ ongoing appetite for pot stocks.

Despite Fusion Pharm’s friendly float size, there are several other factors that should bode well for a longer-term run in FSPM’s share price. The company is already based in Colorado and doing business with local growers. As a result, it’s not “betting-on-the-come” that someday business will pick up: business is already at its doorstep. Moreover, sales had already been kicking in prior to the Colorado legalization law taking effect. In July, for example, Fusion announced that it had achieved $200,000 in sales, including its first pod sale to a California concern. And speaking of California, the state is likely to legalize pot in April, opening up an even more massive marketplace and providing another nice catalyst to the sector.

EDXC chart

FSPM chart

Given FSPM’s recent parabolic move higher, it’s difficult to recommend a precise entry point. Extreme volatility continues to rule the day with these pot stocks, so any entry point is a bit of a crapshoot. That said, those with a longer view and high tolerance for risk may find that FSPM’s shares are a relative bargain even at current levels.

ENDEXX Corp. (EDXC)

Shares of ENDEXX Corp. (EDXC) have also gotten a nice boost with the implementation of Colorado’s marijuana legalization. Based in Arizona, the company has developed what it calls the “m3Hub Technology platform,” a software application designed specifically for businesses engaged in the medical marijuana, and now recreational marijuana industries.

According to the company, the m3Hub platform manages patient concentric data and incorporates best patient privacy practices, the HiTech Act (Health Information Technology for Economic and Clinical Health Act), and patient care services. Through verification, privacy, legal and transparent controls, the m3Hub platform helps legitimize the entire transaction process on behalf of the patient.

Equally interesting as it pertains to the marijuana industry, Global Solaris Group, the renewable energy division of Endexx Corporation, recently completed its first commercial solar installation in Northern Arizona. The 145 kilowatt system is now online after receiving all necessary clearances for commissioning from Arizona Public Service, the largest electric utility company in Arizona, a division of Pinnacle West Capital Corporation. The system generates over 30% per year in energy savings for the customer. ENDEXX management has targeted marijuana growing operations as a prime marketplace for Global Solaris to tap into.

“Global Solaris Group is now positioned with its strategic EPC (engineering, procurement and construction) partners to offer renewable energy products and services to cannabis grow facilities in the US and Canada to reduce expensive operating costs from high energy use,” the company stated in an early December press release. “When factoring operating costs, energy use for lighting and air conditioning has the largest impact on facilities costs for growers and processors of marijuana plant products. Monthly cost of electricity can be as high as $1 per square foot per month or more.” In Colorado alone there are almost 800 significant cannabis growing operations.

EDXC chart

EDXC shares have more than doubled since the Colorado pot law went into effect, currently changing hands for about $0.13 each. As with FSPM, it’s far too early in the evolution of the industry to predict which of these micro-cap marijuana-related entities will emerge with sound and profitable business models. What we do know for sure, however, is that the marketplace for the product is gigantic, and those companies that do come up with “the right stuff” from a business perspective could very much hit it big.

Good luck as always, and remember to trade over-the-counter issues with special care, as they tend to be exceptionally volatile.

Warren Gates
Senior Analyst
Normandy Research

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