Legal Investing in Marijuana Stocks

High Returns or Bad Trip?

Legal Investing in Marijuana Stocks
August 13, 2014

Bummer, dude. Marijuana stocks had been on an incredible high (sorry, couldn’t resist) in the first part of 2014, fueled by the legalization of recreational marijuana in Colorado and efforts in other states. Unfortunately, the SEC provided a buzzkill in March 2014 through warnings related to potential fraud and scams in marijuana investment while halting trade in various over-the-counter marijuana stocks.

Trading in several marijuana stocks have been halted for SEC review and others have received poor press, resulting in disastrous drops for some of the more inflated stocks. Cannavest (CANV), traded at $201.00 at one point, is currently trading at $7.85 and is facing a class action suit on behalf of its investors. Vape Holdings (VAPE) has dropped from $41.25 to $2.63.

Another example is GrowLife (PHOT), which has lost 88% of its value and faces a grim situation even with $6.48 million in sales in the last 12 months, representing an over 200% sales growth. They face a class action lawsuit, and they lost almost $58 million over the last 12 months, with a total market capitalization of only $80.94 million.

So what’s the 411 on 420? (For the uninitiated, 420 is counter-culture code for marijuana.)

The 420 Marijuana index (what else would it be called?) peaked in March at just over 1000, and is now listed at a little under 300. Quite a crash, until you consider that before taking off in January, the index had been steadily valued around $100.

That illustrates the fundamental problem so far with marijuana stocks – many of them have been hyped well beyond reason, and even relatively sound ones are likely to be overvalued right now. Stocks with halted trading are generally passing SEC muster, but the drops in value represent a return to something closer to normal – and they probably are not done falling yet, given the risks.

Investor concerns are probably mirroring those of banks in Colorado that are refusing banking services to legitimate licensed pot sellers – on the assumption that since marijuana is still illegal at the federal level, any participating banks are likely to be walloped with federal penalties and regulations in the future.

If you want to try your hand at pot stocks, treat them like any high-risk stock – perhaps a frontier market stock (you really could argue it represents a new frontier of sorts). Prior to investing in any stock of that nature, good research is important.

Look carefully at what they do. Are they completely speculative, or do they have tangible existing products? What are their products, and what niche do they hope to fill? Do they have other product lines? What regulatory issues stand in their path?

Even if they are legitimate, do they have patents or other protection from being eventually wiped away by larger companies? What are their cash, profit/loss and market cap situations?

There are several indices, including the 420 Marijuana index and the MJX Marijuana index, where you can compare the values, trends, market capitalization, legal challenges, and other fundamentals of pot industry stocks. There are certainly some fly-by-night stocks mixed with more legitimate ones in the indices, and with limited information on the companies, it is not always easy to tell which is which.

If you cannot find out much about a pot stock, don’t invest in it. Michael Block, Chief Strategist with Rhino Trading Partners, characterizes the danger in investing in marijuana stocks this way – “It’s like the greater fool theory. If you can’t figure out who the rube is, you’re the rube.”

If current trends in Colorado, Washington and other states hold, there could be a time in America’s future when marijuana is legalized nationwide, regulated, and taxed. When that day comes, marijuana stocks will probably be a more stable investment, and it will be clearer who the legitimate businesses are. Until then, dabble in pot stocks if you want to, but be prepared for your investment potentially to go up in smoke.

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