Since January 1st, 2014, Pot Stocks have witnessed extraordinary gains. If you were one of the lucky ones to have bought before January 1st, you would have made some nice returns. Stocks like CBIS, HEMP, PHOT, RFMK, MJNA, MCIG, PLPL, ENRT, and CANN have shot up from 300% to 3700%. Now what?
Did you sell? If the answer is no, why not?
And if you are new to this industry and are deciding whether or not to invest, have you considered who you are buying those shares from?
I think it is too easy to either be bear or bull on this industry. I believe one can still make money as long as they understand that this is still a "greater fool's game."
The industry is very real. Companies like Growlife Inc, (OTCPK:PHOT) and Medbox Inc, (MDBX) are attempting to capitalize on this emerging market. And MDBX has made return on equity. But investors are wrong to play this market long.
The pattern of these stocks follows very closely to the dot.com boom, the junk bonds fiasco, even the Tulip Mania. Even though these events left many people penniless, a few were able to profit handsomely. And you still can too. As long as you understand that making money at this point will depend on finding a greater fool.
Anyone that has been tracking this industry closely must have realized that by just making a press release disclosing that the company plans on capitalizing on the multi-billion dollar marijuana industry has jumped dramatically. For instance, Enertopia Inc, (OTCQB:ENRT) announced January 16, 2014 a that they planned to sign a joint venture Agreement with the World of Marihuana Productions. The stock trading at .15 cents has jumped to .44 since, a 293% gain. This stock has seen less momentum than many of the more recognizable tickers such as MJNA, HEMP, or PHOT. It will probably see continued interest as investors catch on that the company plans to capitalize on the marijuana industry. In contrast to some of the better known companies, ENRT has only seen at most $300K volume whereas HEMP last friday enjoyed $11.5 million of investment dollars.
ENRT is one of the few companies that sound legitimate. Unlike many of the other pot stocks, they have not yet diluted their float. They have currently 46.61 million shares outstanding out of the 200 million authorized, 24.8 million are held by retail investors. The company has a current market cap of 16.78 million with an volume average of 300,000. In contrast, Hemp Inc, (OTCPK:HEMP) has an average volume of 63 million and a short interest of nearly 75%. ENRT benefits from the new Canadian MMPR program, which allows for licensed producers to grow and sell marijuana for medical purposes. That is, if it gets its license.
ENRT is one of the many companies that sounds great until you dig deeper and realize this is just another greater fool's play. Originally a Metal Mining company called Golden Aria Corp until 2010, this company's recent growth in share price affirms that by merely mentioning interest in becoming a Pot Stock is enough to make investors flock in droves.
Nevertheless, ENRT could be a solid bet so long as it can be trusted to use capital efficiently. As a mining company, ENRT has operated at a loss. Buying stock in this company means buying their debt of 400k. Now, CEO Robert McAllister has decided to enter in the Medical Marijuana game hoping to finally turn a profit. ENRT has recently made a lot of binding agreements relating to the marijuana industry that could pay off. It recently a LOI to acquire E-Cig technology from wisplite.com and a LOI to purchase a 60,000 sq. ft. facility to grow medical marijuana. The question is, do you trust ENRT to use your investment efficiently? Without demonstrating efficiency this company will unfortunately be subjected to pump-and-dump players until it posts a profit.
There are two clear plays for ENRT: play for the pump and sell before the dump, which could happen as this company gets more coverage. Or you could wait for a company that has already established a profitable medical marijauna business before deciding to go public. This is investing 101.
Although obvious, I think investors have forgotten investing 101. Companies go public in order to raise capital. Usually, a company has to demonstrate a strong business model to potential investors before selling off the ownership of their company. Otherwise, the company risk losing the value of their company by the short-sellers. In evaluating Pot Stocks, you have to consider whether the company is efficient at utilizing capital and why they have decided to go public.
For most of the pot stocks listed, they have yet to figure out how to use their capital efficiently. According to their disclosure, HEMP has made a gross profit of a $1,000 for 2012 but have acquired nearly 16 million in debt. Investors have poured almost $300 million into this company on the fact alone that plans on capitalizing off the legalization of hemp for industrial purposes. Even though this company plans on capitalizing off this new industry, are the people running it capable of doing so?
CEO of HEMP, Bruce Perlowin, thinks so. Part of HEMP's $16 million liabilities is the $1,181,249 owed Perlowin himself as of their September 30, 2013 filing. This number has nearly doubled from $671,231 as of December 2012 and will continue to do so even though HEMP has yet to make a viable return on equity.
One company that plans on going public, Tweed, is a licensed Canadian MMPR producer has already established a viable business. Unlike its competitors, Tweed established a profitable business first before going public. It will be traded on the TSX Venture Exchange. However, like most Pot Stocks, this company will see high volatility and will be considerably overvalued until this Pot Mania blows over.
Why so bearish? I'm not. I just think investors should understand the game and play it accordingly. However, value investors should stay away from this industry. But for those who want to play the greater fool's game, I recommend buying stock in a company as soon as it announces that it plans on joining the medical marijuana industry. It doesn't matter how many times the company has changed its name or business model. As long as the trend keeps up, you'll find a greater fool to take your "dope" off your hands.
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.