Did Medical Marijuana Get Too High?

Feb. 4.13 | About: Medical Marijuana, (MJNA)

Our recent article covering Medical Marijuana (OTCPK:MJNA) was written when the price was .20. Currently the price is .45 and it's up over 240% since we started recommending buying it. Obviously, this is a huge move, and is cause for analysis.

There hasn't been any significant news releases by the company, nor has there been any substantial news regarding the legalization of Marijuana.

Recent pot news

Bloomberg ran a cover story on the potential legalization of Hemp for farmers in Kentucky:

Kentucky Republicans and business leaders are promoting an unlikely way to boost the state's economic development: Grow cannabis.

Kentucky leaders want their state to become the king of hemp, a plant that comes from the same species as marijuana, though doesn't contain enough of the intoxicating ingredient to cause a high.

They want to help state farmers overcome the federal government's treatment of hemp as an illegal drug, and produce it on an industrial scale, for use in items such as soap, horse bedding, building materials and auto body parts. Kentucky is one of at least five states, including Indiana and Vermont, where lawmakers have introduced measures allowing hemp farming.

The Kentucky effort is supported by legislative leaders, the state chamber of commerce, Republican U.S. Senator Rand Paul and agricultural commissioner James Comer, a Republican who campaigned on bringing the crop to his state.

"It could produce thousands of jobs," Comer said in an interview."Industrial hemp is totally different than marijuana. It should be treated like corn or soybeans."

But this isn't really connected to Medical Marijuana, although it does suggest a growing interest in the plant as a means to generate revenue for beleaguered state budgets.So if it wasn't the news, or an announcement for the company, what caused the recent run up?

We can only speculate. We should note that the entire industry has been getting more and more coverage, with other Marijuana issues being up such as Cannabis Science (OTCPK:CBIS). Maybe it just took time for Medical Marijuana to get discovered? And once the buying took place, it started popping up on stock screener's? Without any data, we can only speculate on why the stock recently ran up so severely.

The big question: Can it continue?

First, we have to consider how quickly this stock has moved. It's up over 60% just today, hitting a high of .50 just as this article is being written. The chart on Google Finance doesn't even show the top:

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(Click to enlarge)

When markets go parabolic, they usually retreat. But is this just Medical Marijuana being properly funded? The PE ratio before their recent earnings announcement was below 1, now it's 75.

In case you missed this opportunity, it's probably to late to get long. Buying now would be very risky, as it's already been up by so much. If you are looking to get long, it's best to wait until the market settles down a bit. But the question is, is it time to sell? There isn't any reason to; although the price may settle down due to the huge run up, that's not a clear sell signal. If you were looking to go long, it would be a good time to buy on dips.

The cautious trade

The cautious play if you have been long since below .15 would be to sell 1/2 - take some profits and let the rest ride.

As far as how high it can go, that's anyone's guess. It could go to $5 per share or it could go back down to .25. There's really not enough data to extrapolate a potential top here. It's been already alarming how quickly it moved up but maybe that's just the market confirming what many of us were already suspicious about, that Marijuana may be the next big growth sector.

Many issues in Marijuana also up

Traders should note that Cannabis Science (OTCPK:CBIS) is also up 34% on the day, Hemp Inc. (OTCPK:HEMP) up 41%, Growlife Inc. (OTCPK:PHOT) up 37%. This is a strong indication of investor interest in the industry, not just hype about a specific issue such as MJNA. That's not to say there isn't some hype priced in here, but it's not all hype. Of all the micro-caps, we had picked Medical Marijuana for reasons we outlined in a few articles. But the interest was in the industry itself, being something new and uncharted. So today's move, more important than having a successful trade in Medical Marijuana, it's a vindication of this being a viable new industry, not just a fluke.

Overall, the alarming factor about Medical Marijuana was not how high the price went, but how quickly it went so high. Many traders thought this price might be reached over a period of months. To see it happen in a week was just a bit surprising. Hopefully it will cool down a bit here so we can see the rally continue on a steady basis.

Disclosure: I am long OTCPK:MJNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.