Marijuana Stocks Are Extremely Dangerous Investments

Apr. 14, 2013 7:58 AM ETCBIS, GRNH, HEMP, MJNA, PHOT157 Comments
StockBaller profile picture

The legalization of marijuana in America continues to be an extremely hot topic, with most polls I have looked at concluding that the majority of those surveyed support marijuana legalization. I am also in favor of marijuana legalization and am hopeful that more states will continue to legalize marijuana for recreational use (currently there are only two, Washington and Colorado). And with all the media attention for marijuana legalization, certain marijuana-related stocks have experienced massive surges in volume, largely from amateur speculators who intend to buy-and-hold in the belief that these stocks will get very high in future as marijuana use is made legal.

Unfortunately, at this stage I do not believe there is a single reputable marijuana stock on the market. Having previously investigated several marijuana stocks, and having observed the price action and news of the major marijuana stocks over the past few months, I believe that the only people set to make a lot of money from these stocks are the company insiders and smart day-traders.

Why Do Investors In Marijuana Stocks Face Enormous Risk?

Because the fundamentals of the primary marijuana stocks being traded are horrible, they have extremely limited histories, and there are numerous skeletons in the closet. All the primarily marijuana-focused stocks being traded right now are traded on the OTC or Pink Sheets, which are considered by some to be the gutter of the stock market. There are no minimum requirements for a stock to be listed on these exchanges. In fact, a company can have no assets, no revenue and no employees, and still be listed here. That's why all the main marijuana stocks trade on the OTC or Pink Sheets: because they're not solid companies by any means.

To be clear, there are credible NASDAQ and NYSE listed stocks in a range of industries that might benefit in some small way from the legalization of marijuana (see this article). But all the stocks I have seen whose primary and only business model is in marijuana and marijuana production are extremely dubious. A few examples (see my previous article on marijuana stocks for more information):

  • GreenGro Technologies (OTCPK:GRNH) has no SEC filings filed, unknown financials and revenue, and their twitter feed has many tweets trying to hype up the marijuana industry and lure in investors.
  • HEMP, INC (OTCPK:HEMP) also has no SEC filings filed and unknown financials.
  • Growlife Inc (OTCQB:PHOT) had net loss of over $2 million in 2012. Searching their annual report brings up a familiar phrase: "there is substantial doubt about our ability to continue as a going concern."
  • Cannabis Science (OTCPK:CBIS) has absolutely horrible fundamentals, with $9,492 in cash in their latest 10Q, and losses of $81,049,984 since inception (how they could possibly run a profitable operation at this stage is beyond me).

A look at charts for these stocks show that they all very closely mimic each other, and all of them have fallen around 50% from their highs a couple of months ago. It should be obvious that the movement of marijuana stocks like these is not based on their fundamentals and real business merits, but rather hype and speculation. That is why I am making it very clear that these stocks are not for investing in. As with many stocks listed on the OTC and Pink Sheets exchange, the chance of any one of these stocks rising from the ashes and ever becoming anywhere even close to profitable is basically 0.

Regarding Medical Marijuana (OTCPK:MJNA)

The only marijuana stock that may appear to be running a strong business (and which is the most popular and widely discussed marijuana stock) is MJNA, which recently reported Q1 2013 revenue. MJNA still trades on the Pink Sheets, but it has a substantially higher market cap than any other marijuana stock (currently over $200 million). MJNA has been highly profitable for many traders (see a couple of examples here and here), but I believe that as with all other marijuana stocks, only an ignorant speculator would hold this stock in their long term portfolio. The two main red flags for MJNA, in my view, are its earnings and management.

  • Questionable Earnings: MJNA's Q1 2013 earnings may seem strong (net income of approximately $5.52 million on gross revenues of $8.45 million), but the numbers are very misleading, as they are counting $4.5 million in stock (not cash) received from CannaVEST (CANV.OB) as part of their revenue. CANV has extremely low trading volume and I am not aware of any of their business operations (a search for "CannaVEST" yields only results about their deal with MJNA). I am reminded of numerous pump-and-dump schemes that make "deals" with non-existent shell companies for the purpose of putting out a fluffy press release. In this case, given that CannaVEST appears to be nothing more than a shell stock, I am extremely suspicious that this deal with done primarily to boost MJNA's revenue numbers to make it look attractive to investors. See this article for more information regarding the deal with CannaVEST.
  • Dubious Management: The management team of MJNA previously included a previously convicted criminal (Michael Llamas), while other members appear to have next to no experience running real companies, as this detailed article explains. We know that insiders have been selling shares to the public too (here is one example of insider selling from Michelle Sides, the Chairman).

The Bottom Line

If you are not an experienced trader, just stay away from marijuana stocks altogether - they all represent terrible looking long term investments based on their financials and the numerous red flags present. MJNA is a step above other marijuana stocks, but it too is extremely sketchy and something that I recommend staying away from.

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.

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StockBaller profile picture
I write about many different companies and especially news that has resulted in various low cap stocks jumping up in price significantly. It's my pleasure to be an author at SeekingAlpha and share my analysis.

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