This article in no way is "against" marijuana. While I personally don't use marijuana, I am in no way criticizing those who use the substance, nor do I have any problems with its legalization. I believe that eventually - whether it takes years or decades - marijuana will be legalized, and then you will see big tobacco companies sweep in and either take the market by storm by themselves, or they will go on an acquisition spree. That being said, given the evidence available today, it is likely that Medical Marijuana Inc. (OTCPK:MJNA) will not be a part of this "legalized" future.
Told You So...
If you had listened to me back in February about Medical Marijuana, then you've probably saved yourself a lot of money. Shares are down nearly 50% since my initial article was published, which means that if you want to ever see your initial investment again, you're going to have to see the share price double. This seems unlikely, especially as our own Alan Brochstein's fine detective work uncovered the truth behind this organization: the majority of the company's sales may not be legitimate. However, this article isn't here to talk about the fundamentals of the company per se - it's to help educate you about the mechanics behind these sorts of penny-stock "pump and dump" scams. This is required reading for anybody who lost money on this stock.
The Shameless, Nameless Pumpers
The majority of "name brand" stocks such as Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL), and Johnson & Johnson (NYSE:JNJ) are so large that most individual investors' buys and sells won't make a dent. In economic terms, the market for these stocks is perfectly competitive. But when you go into the deep underbelly of small/micro-cap stocks (sub $1B and sub $100M market caps, respectively), institutions such as the big mutual funds are rarely involved, so the price can - and very often is - moved by individual investors buying and selling.
When it comes to over the counter penny stocks such as MJNA, this phenomenon is exacerbated significantly. The average daily volume is 7 million shares, which means that a fairly big individual investor making 5 to 6 figure dollar value buys and sells can have material impact on the share price. Say that I wanted to sell 500,000 shares and the stock is currently trading at $0.17. Do you really think that I could get away with putting in a "sell" order for a block that large and have somebody on the other side of the trade just ready to fill my order? Of course not! If I wanted to sell my shares, I would need to take whatever bids currently in place, which may be lower than the $0.17 highest bid available. This would lead the stock price down significantly.
So, what do I do if I want to sell a bunch of shares at a decent price without attracting too much attention? I'd have to wait for a time when people are giddy and more than eager to buy up shares. At that point, I would take the opportunity to unload. That's why every time you see MJNA put out a fluffy press release, there is initially a big rally that eventually fades; the "smart" money is using the irrational buyer exuberance to unload. In my view, given the lack of transparency regarding insider transactions, it is very likely that the insiders themselves are taking the opportunity to sell into these PR-driven rallies.
But more importantly, for these kinds of stocks, you need to watch message board activity (InvestorsHub, Yahoo!, etc.) to see when exactly the "pumpers" come out and what they're saying. For those of you unfamiliar with the term, a "pumper" is somebody, usually behind an alias, that comes out and tries to soothe investors by claiming that "something big" is coming up and assuring the more gullible that they are "buying more".
See, the "pumpers" of penny stocks generally show up on "up days" in order to persuade people to keep buying so that they can quietly unload into the rally. Then, when they're done selling and the stock price craters, they'll tell the bagholders (after the stock has lost well over 50% of its value over a couple of months) reassuring things such as,
- You don't lose 'till you sell
- The SEC is going to investigate those mean old SA authors
- The shorts just want cheap shares
- The chart is oversold
- The audited financials are coming soon
The worst part about all of this? These "pumpers" convince unsuspecting individuals that a "short squeeze is coming" or that people saying negative things about the stock will get sued, that the "shorts" are responsible for the drop (despite only about 1% of shares of this stock actually sold short), and that articles on Seeking Alpha - and not the facts in them - are the reason that the stock continues to plummet. It is sad that people still "fall for it", but it is an unfortunate reality of the market.
The "Bashers" Have It Right
While some individuals involved in trying to pump the stock want to convince you that the "bashers" are "evil", the problem here is that the "bashers" have the facts on their side. Alan Brochstein's work has all but put the nail in the coffin of any hopes that this is a legitimate company "raking it in" with cold, hard facts. When people "bash" his work, they do not typically provide evidence, nor do they want to actually listen to the arguments. Instead, they hide their heads in the sand and "moderate" away his posts so that the unsuspecting, innocent investors don't see the truth.
If you purchase shares of MJNA, you will lose the majority of your investment. This is most likely a scam run for the benefit of the insiders trying to unload shares. Once they've made their money, the "audit" process will suddenly go dark, the press releases will stop, and the equity will drift down to $0.02. Buy real stocks that file financials with the SEC, that don't engage in shady transactions, and aren't run by folks that you wouldn't loan $5. It's not too late to cut losses and/or take profits while the stock is still worth something since the remaining pumpers may still manage to sucker a few more investors. Ride that wave. Get out before it's too late.