Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
There has been a lot of interest recently in marijuana stocks thanks to it being newly legalized in Colorado and Washington state. One stock in particular, Growlife Inc. (OTCPK:PHOT) is going rocky mountain high with over a 300% gain in just the last month, but is this a legitimate opportunity for investors or just another classic pump and dump penny stock scheme.
Let's start with the company fundamentals.
The most recent quarterly "reported" revenue growth for the firm is impressive with nearly 100% year over year growth. But at what cost is this growth coming from? From the $870k in reported revenue Growlife indicates a total loss of over $1 million, so in essence they are losing over a buck for every dollar they make in sales. With operational margins this horrendous it seems unlikely to make up this deficit regardless of future sales volume and growth.
You might also notice I use the term "reported" in quotations. The reason for this is that many of the claims of Growlife smell funky. Growlife, like many other pump and dump schemes, is the byproduct of a reverse merger in 2011. These types of companies are able to gain access to securities markets via low cost and unregulated transactions by purchasing the non-trading shares of another defunct company. The newly appointed CFO, John Genesi, seems to be an expert on these deals. His last listed CFO job was at LandBank Group, which according to SEC Reports was a company founded in 1997 that went dormant for years, came back as a network storage company called iStorage Networks, and then turned back into LandBank to make tax lien purchases at foreclosure auctions. Best guess is that next to no business occured during any of these changeovers, but plenty of stock issuances were done along the way to cash out the scheme for executives. Let's give the guy credit though, he certainly can spot bubble niches like a pro.
So, what specifically is the buzz kill for Growlife? They claim to have sold 150,000 Phototron units over the past 25 years. Upon inspection of their website the lowest cost unit available is approximately $500. At 150,000 units basic math would indicate that the company sales at least 6,000 devices annually (and should be substantially more over the past two years). That would indicate at least $3 million annually in expected sales, and this is just from one of their 9 business units. However, the entire sales for 2009, 2010, 2011 and 2012 equal only $2.5 million, thus making one question the viability of these 150,000 sales. To further muddy the water, their best selling model has 2 reviews on their website. Not exactly a ringing endorsement of their product which supposedly has 150,000 sales.
Finally, Growlife currently has a market cap over $200 million, about the same size as Radio Shack. Many will ignore my tale of caution and decide to invest anyways, and who knows, maybe the stock still has a leg up from here. However, in my experience with penny stocks when they get to this size the regulators start to take notice. When that begins to happen expect the short-term buzz from Growlife to end, because after the party is over this stock will be back below 5 cents at best and non-trading at worst.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.