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If you told me three years ago that I would be writing an article boasting my newfound interest in marijuana stocks, I would have told you to go cue up your best Pink Floyd album and roll another big one. But times have changed, and with 20 states, as well as the District of Columbia, now recognizing the use of marijuana for medical or recreational use, it is now time to jump on this train and get set for a wild ride. The latest news, as of Monday, is that perhaps Florida will be added to the mix, as the Supreme Court has issued a ruling to allow the referendum to be added to the November 2014 ballots. My guess is that Florida becomes the 21st state to legalize the use of pot.
Of all the marijuana industry stocks I screened, I have settled on Growlife, Inc. (OTCPK:PHOT) as my choice to test the proverbial waters, hoping not to get caught in the weeds (pun intended). There are several reasons on why I chose PHOT as my sector stock, understanding full well that I might see 25%-30% peaks and valleys in the daily price per share. If you have read my prior articles, you can rest assured that I will also offer an opinion as to why I chose PHOT. But with a long-term horizon I am willing to wager a small portion of my portfolio into the reality that the marijuana industry is going to be a multibillion-dollar market within five years.
Longer term, I would certainly shift to the big players that will eventually own this space but for now shy away from associating with the market, such as Altria (NYSE:MO), Phillip Morris (NYSE:PM), Reynolds American (NYSE:RAI) and the rest of the big tobacco fraternity. I have no doubt whatsoever that these behemoths will eventually own the space and will take along all of the successful small-timers for the ride. Infrastructure gets purchased, plain and simple. It's the shortcut best applied to growth. It's our job to pick the winners who will provide a reason to be rolled up.
But, back to PHOT, a stock that certainly is smelling better going forward. First, PHOT is a fully reporting company. They have filed current quarterly reports, made proper and timely 8-K filings and surprised me with a recent and bullish Form 4 report. The reports are professionally prepared and signed in Sarbanes-Oxley fashion. I like stocks where officers must sign their name on the dotted line under the threat of perjury. It provides comfort to me, especially when it's a micro-cap stock with virtually no coverage.
Second, I like that on Jan. 13, 2014, insider Alan Hammer purchased 225,000 shares on the open market for $42,746. His purchase price was approximately 19 cents per share. Certainly, Hammer knows more than me and if he is a buyer at these levels, well, I feel more comfortable in my decision as well.
Third, Growlife is not directly involved in the handling or distribution of the actual product. Growlife is working to position themselves as the grower's best friend, by taking the initiative to supply grow equipment to a new generation of farmers at terms considered enormously favorable. Growlife is looking to become the predominant supplier of grow equipment in the country by offering partner programs that will actually supply initial equipment to growers at little to no upfront cost. Certainly, this strategy might pay handsome rewards if they can achieve the traction I expect.
Let's be honest here: No one on Wall Street can analyze any of the numbers in this industry at this point in time. We are at the infancy of a boom, similar to the dot-com explosion. Companies will be extremely overvalued and there will be a time when many of these wannabe pot magnates will get stoned to death. But, just as we saw in the dot-com boom, many billionaires were made during the heyday, and knowing when to cash out is just as important as knowing when to get into the game.
Yes, there are competitors, but most do not file with the SEC. Many give glowing company updates, similar to the ones that Medical Marijuana (OTCPK:MJNA) puts out in the public domain, but without having to sign an official document, these releases are meaningless to me. There is no accounting, no audits, no officer signature and no way to verify that the information they are providing was booked from revenue, private placements or other mechanisms that appear to be revenue -- only to be revealed as a revenue gimmick. I don't mean to bash MJNA, especially when they have outperformed PHOT during the prior couple of weeks. But they are simply not my bowl of fruit.
I like companies that I can call on the phone. I like the ones where I can read a 40-page, boring as heck 10-Q filing. I like to see how shares are being handed out and I like to see where the company has been. I don't truly care about the past; I stated that in my bold article about Advanced Cell Technology (ACTC) when it was 25% lower in cost just a few days ago. All micro-caps have a past, most born from reverse mergers and a whole lot of dilution. They don't go straight up, either. So, patience is often necessary to be rewarded.
Many micro-cap stocks, like Growlife, had weird names and industry associations, meaningless to what they actually do today. Many bears, however, often point to these trivial points in a quarterly filing to show you how silly you would be to invest in a particular stock. Not me, though. I look to see the names, numbers and plans of the current team. I look to see if they have funding, if they have an infrastructure, a business plan and a vision that separates them from competitors.
I get a good feeling from PHOT. I like the way that they are trying to position themselves as suppliers of industrial technology instead of seeds and soil. I like the way that management is communicating to shareholders, begging for an approval to authorize more shares so that they can complete accretive merger and acquisition plans. Sure, dilution hurts big time, but, I can almost guarantee with utmost certainty that Jamie Dimon over at JPMorgan Chase is not trying to wine and dine the industry. So we accept what we cannot change, for now at least.
There is a good argument that increasing authorized shares by 2 billion is an awful thing. Well, it is if you are looking to make your entire gain in the next three months. I see it differently. I need PHOT to have currency on hand at all times. I need them to be able to acquire, at will, any company that can be immediately accretive to revenue and earnings. I need PHOT to be able to make new partnerships by using stock as an incentive to merge. I care about dilution, but, I am not short sided on the potential of this company as it navigates its way through these initial months and years in the highly political and opinionated industry.
I took an initial investment in Growlife simply as a sector play. I looked at Hemp, Inc. (OTCPK:HEMP) and GreenGro Technolgies (OTCPK:GRNH), for instance. All of the aforementioned have had terrific runs as of late. But I can't even verify if any of the two aforementioned even has a legitimate office. Hemp, Inc. has no current filings and GreenGro has not filed since 2007. Heck, they might own the 40th floor of the Bank of America building, but I don't know essentially because they don't file anything legal for me to read. The only thing real is the increase in their price per share, but I fear that all of it can go up in smoke in a matter of minutes.
I just do not have that same fear with Growlife, Inc. Yes, they have an ambitious plan and a scary dilution requirement. But, with the euphoria in this market, I can't get a grasp on whether or not Wall Street investors will applaud or run from Growlife once the deal is complete.
Many people are speculating, but, no one truly knows what the reaction will be if management gets their wish and shareholders approve the increase in authorized shares. I , for one, will reiterate that I would rather have a company that is entering a billion-dollar sector to maintain a fat wallet. There is going to be so much consolidation in the next several months and years that it would be foolish to blame management for being proactive in this request, as they work to remain competitive in this extremely lucrative market.
One can hate the industry, but, as an investment, it just might be one of the best growth opportunities in the market today. Take a look at Growlife, Inc. and see if it is the growth opportunity you are looking for. Trying to time these stocks is frivolous as they all move in the same direction at the whim of the electronic trading systems. Growlife, Inc. is a buy and hold. There will be a time to sell, but, if you have the capability to let the smoke settle before you sell, you just might be giggling too.
Disclosure: I am long PHOT. 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.