Investing in Marijuana Stocks: Can’t Tell the Smoke From the Mirrors

Just stick to a tried-and-true pyramid scheme.

During the first week of February 2017, 86-year-old former United States Senator Mike Gravel made headlines by netting nearly half a million dollars on selling shares of a marijuana penny stock in a company known as Cannabis Sativa (OTC: CBDS). Back in October 2016, Gravel cashed in for more than $100 grand by dumping 32,222 shares of the same stock.

As inspiring as Gravel’s profits are, do not be deceived into believing that a similar windfall is likely to be yours by investing in cheap and volatile weed stocks. You do not share the advantages of Mike Gravel, which include being CEO of CBDS.

If you are cannabis-curious, and you read Forbes, you may have been intrigued to learn that 2016’s North American legal marijuana sales increased 30 percent over the previous year, topping off at $6.7 billion. Beyond that, if you’re a weed watcher who reads the Huffington Post, you may have been jolted by the fact that North Americans, when you factor in illegal purchases, actually spent a far greater $53.3 billion on marijuana in 2016!

Something is in the air. What can it be, if not burgeoning smoke clouds of billowing cannabis valuations?

Those bloating billions, and an assumption that legal-weed will expand state by state, perhaps within the next few months, until the entire nation is a ten-minute drive from dropping 50 bucks a week at a mini-mall dispensary, create the impression that big money is to be made in legal marijuana. There is a deep and swift-running suspicion throughout the land that becoming a rich person will never be as attainable as it is right now, in the marijuana world.

Acquaintances are always asking, “Hey, dude! How do I go about shoveling some of that marijuana money into my wheelbarrows?”

They remind me that recreational weed won big electoral victories this past November in Nevada, Maine, Massachusetts, and California. The entire nation of Canada may be lighting up legally after spring 2017. Surely, the stage is being set for all of us to make millions in the fields of pot and plenty!

Image via Flickr

These are savvy people. They acknowledge that learning to plant seedlings and developing a horticultural discipline is more trouble than they are willing to take. But what about stocks!

Surely, I can recommend a suite of sure-fire weed stocks that will take a basic starter-house down payment and turn it—preferably within half a year—into enough money to buy outright an entire city block of mixed-use structures.

No one believes me when I say, “No. I cannot in good faith recommend weed stocks for you to buy.” These speculators suspect that I am holding out.

These well-meaning people, yearning to invest, wanting only to provide their families a driveway full of Porsches, protest that they smell the scent of sure-fire profits. Something is in the air. What can it be, if not burgeoning smoke clouds of billowing cannabis valuations?

Otherwise levelheaded North Americans plunge into the cannabis pool, their guts leading the way, their brains playing catch up.

Would-be marijuana investors, seeking magic picks, tend to quote online articles as evidence that early adopters stand to reap unmanageable pot wealth. Their emails contain links to stories such as this Stock Emperor trend forecast that—based on marijuana sales going up 30 percent in 2016 while Facebook’s stock only rose 14 percent in the same year, and Google’s 5.5—concludes marijuana is a better investment than Facebook or Google.

On the foundation of a marred equivalency (as if a one-to-one correlation exists between sales revenue with stock value), Stock Emperor lists five cannabis companies, ranging from a marijuana cosmetics startup to a weed-grow construction service, and flames what former Federal Reserve Board chairman Alan Greenspan might characterize, using understatement, as “irrational exuberance.”

From Stock Emperor’s “Legal Marijuana Better Investment Than Facebook or Google”:

I suggest investing in those stocks with a leverage and hold it to the end of the year. Your earnings should grow just easily as a cannabis grow in a hot cabinet.

Growing cannabis in a hot cabinet, for people who are novices, is generally a string of jarring setbacks ending in total-loss disaster.

Nonetheless, there’s no law dictating that one of the five weed businesses on Stock Emperor’s buy list won’t rocket to stock-splitting super stardom! Some Stock Emperor readers may even, perhaps surely, leverage tiny initial payments in these weed stocks into a life of ease and endless vacation!

With weed, as all smokers know, anything feels like it could be possible—which may be a key to understanding other-than-rational spending on weed stocks.

Image via VSCO

Otherwise levelheaded North Americans have been beguiled by an intuitive intoxication that experiences a pot long shot as a weedy certainty. They plunge into the cannabis pool, their guts leading the way, their brains playing catch up.

In Canada, for instance, prices for top-performing weed stocks tripled in half a year. That factor of three has pulled in a surge of first-time investors, but this spreading exuberance for weed “investments” has emboldened naysayers to remind Canada’s general, bullish public that the laws of physics apply to the financial world too, as in what goes up can come down, hard.

From MSN Canada’s “Investors Dive Into Marijuana Stocks, Raising Concerns About Green Bubble”:

Brad Austin made $70,000 only five months into what he expects will be a years-long investment play.

“I took that $20,000 plus $5,000 of my own, and it was just growing, so I took an additional $20,000 that I had in my savings.

“It was too good to be true, I thought. It was growing so fast. And fast for me then was $2,000 or $3,000 (a day). One day I made $5,000. I thought, whoa, this is crazy.”

Brad Austin had no experience playing the stock market, and has no investment advisor. He does have a history of being very lucky. He won his initial 20 grand seed money by playing slot machines. That should be Rule One of Weed Investment. If you can win 20 grand off slots, then you may have that singular quality needed for enduring wealth derived from pure-weed stocks—dumb luck.

Austin told MSN Canada “he believes his investments are parked in low-risk bets.”

But there could be some issues.

When dealing with intoxicants—such as the notion of attaining immediate riches—it’s hard to keep your wits level.

As far back as November 30, 2016, Internet-based market watchers detected ripples in the cannabis-stock profit stream that might be indicative of dangers below the surface. Not everyone dwelt on the presence of potentially capsizing realities.

Check out what passes for due diligence in MoneyMorning’s “20 Marijuana Stocks to Watch in 2017”:

Marijuana could become the fastest-growing industry in North America…

However, investors still need to keep in mind investing in marijuana stocks is speculative. That’s because marijuana is still illegal under federal law.

This is also not a list of recommendations. Rather, it’s stocks to keep an eye on as the barriers for marijuana companies are removed through legalization.

If nowhere else, Money Morning shows wisdom in hedging its position. The 20 pot-centric stocks corralled on its watch list are a mixed bag: Some dropped 88 percent and thereabouts in value during 2016; others rose by 200 percent and more. The bulk of these companies are dependent on producing or aiding the production of marijuana, providing marijuana expertise, packaging marijuana data, or establishing social media and payment platforms for marijuana enthusiasts and entrepreneurs. Until reaching its top two picks (Scotts Miracle-Gro Co. and UK-based GW Pharmaceuticals Pic), the Money Morning watch list is loaded with businesses that are all-in for marijuana, and all in marijuana.

That marijuana-superior business model is what’s firing investor fervor. It also brings in a daunting set of real-world problems.

Image via Flickr

To expand Money Morning’s “illegal under federal law” disclaimer: Possessing, cultivating, using, transporting, and selling marijuana all still rise to the status of felony in the eyes of federal law-enforcement agencies. Every business or consumer touching the plant does so under the suspended threat of imprisonment. That is one consideration to keep in mind before clearing out your kid’s preschool fund and dropping it into the local hash-oil factory’s IPO.

When dealing with intoxicants—such as the notion of attaining immediate riches—it’s hard to keep your wits level. Money Morning, despite its sober reminder that marijuana business is still on the books as an illegal enterprise in the U.S., amends its weed-stock surveillance list with an over-the-top assurance that readers can expect to make at least $1 million by following its weed-picking lead. The 20 companies named in the article, it seems, are only the tip of an emerald ice berg:

There are even more companies for investors to target a seven-figure weed windfall with the top pot stocks from every ecosystem—growers, edibles, dispensaries, and more…

As a service to Money Morning readers, we’re now making available a 90-page cannabis investing guide called “The Roadmap to Marijuana Millions.”

Normally valued at $499, it can be yours absolutely free.

A link is provided to click for your free copy of “The Roadmap to Marijuana Millions.” Unfortunately, the offer was available only to the first 500 suckers; so if you’re interested, chances are you will need to get fleeced elsewhere.

The question is: Do you want to put your money behind all that, or toss it in with a marijuana advice crew?

Legitimate business reporters do recommend so-called cannabis stocks. These recommended companies tend to have a few factors in common; primary among them is their businesses encompass a wide range of endeavors beyond cannabis.

The Street, for instance, characterizes putting money into penny stocks as more like throwing dice than investing. Penny stocks, by the way, is a term designating a generally deplorable basket of highly speculative, so-called securities that are usually sold over-the-counter by very small companies exhibiting “illiquidity” and very low market capitalization. Many pot stocks, all best wishes to them, fall into the penny stock basket.

In order to escape the penny stock ghetto, it’s necessary to expand the criteria for what qualifies as a cannabis stock.

When The Street proposes making a play in the pot sector, the site stresses the importance of company size and liquidity and jumps straight to highlighting offerings from three established corporate entities—AbbVie, Scotts Miracle-Gro, and GW Pharamaceuticals. None of these companies are basing their reputation on a grow facility or new vape technology or any other marijuana-specific enterprise—and none of them will revert to zero if, for instance, expected revenues from one particular crop are wiped out.

AbbVie, for instance, is included under the cannabis-stock umbrella thanks to its drug Marinol. Marinol is FDA approved and on the market. It helps restore appetite to chemotherapy patients and people suffering from AIDS. AbbVie delivers the drug in pill form, and derived it from synthetic THC.

The Street’s “Here Is Why to Grab These 3 Top-Quality Marijuana Stocks in 2017” bullet points on AbbVie illustrates what the pharma powerhouse has that spiking, marijuana-specific stocks lack:

1. AbbVie (ABBV)
Cash-rich AbbVie already has an approved marijuana medicine that is just a small part of its pharmaceutical pipeline. The company boasted sales of more than $25 billion last year, and sales have increased steadily every year from $14 billion in 2009.

This growth will deliver market-beating gains to investors for many years.

AbbVie sells its products to wholesalers, distributors, and government agencies. Its range of medications are used to treat autoimmune diseases, leukemia, chronic hepatitis, respiratory virus infection, symptomatic low testosterone, exocrine pancreatic insufficiency, hypothyroidism, prostate cancer, endometriosis, central precocious puberty, anemia, Parkinson’s disease, metabolic conditions characterized by high cholesterol and/or high triglycerides, and secondary hyperparathyroidism—whatever that is. The question is: Do you want to put your money behind all that, or toss it in with a marijuana advice crew?

Of the three cannabis-adjacent companies earmarked by The Street, Scotts Miracle-Gro has made the boldest move into marijuana. The Motley Fool summarizes the Miracle-Gro pot strategy in a post titled “3 Marijuana Stocks Ready to Soar in 2017”:

Scotts has been scooping up leading hydroponics companies over the past few years. In 2014, the company gained control of AeroGrow International. In 2015, it bought General Hydroponics and Vermicrop. Last year, Scotts acquired American Agritech and Gavita, which markets indoor lighting systems for greenhouses and hydroponic gardening. These moves have helped make Scotts Miracle-Gro a go-to provider for marijuana growers.

Scotts Miracle-Gro, however, has dozens of brands flying off the shelves at Home Depot and Walmart and at every other big-box outlet where gardening supplies are sold. The Scotts fortunes will not disappear if the future of legal marijuana becomes an unrealized thing of the past. That’s why Miracle-Gro keeps popping up on money-talk sites—The Street, Motley Fool, ForbesYahoo FinanceMarketWatchMarijuana—when the conversation turns to cannabis stocks.

To be fair, and to spread around the potential glory, Scotts Miracle-Gro is not the only large company with a marijuana aspect that is a common stock of interest on finance-forecast sites. AbbVie, of course, is a recurring best bet, along with U.K.-based GW Pharmaceuticals (its Sativex is marketed in 16 countries for treating multiple sclerosis spasticity) and Insys Therapeutics (which recently won regulatory approval for anti-nausea drug Syndros, its first cannabinoid product).

Still, even these solid entities are not sure bets for a seven-figure windfall. As Investopedia puts it in “Top 4 Medicinal Marijuana Stocks for 2017”:

Understand that the risk is high that any of the drugs discussed in this article could fail or disappoint. Some medicinal marijuana stocks will no doubt succeed in 2017, so research and vigilance should be your guides when navigating this burgeoning but volatile industry.

Or, you could go up to Canada, where Brad Austin and a wave of other first-time investors are riding a swell of bold expansion that extends up to the people running the weed companies themselves. Cannabis Canada is making moves, and not just on its home turf. They are moving in on the USA.

From the Phoenix, Arizona, New Times:

A Toronto firm recently announced the “acquisition”—with caveats and disclaimers—of two Mesa dispensaries.

The $27 million deal includes one of the state’s biggest cannabis-extracts brands and an option to control a cultivation and wholesale business in Nevada, where voters legalized recreational marijuana in November.  

Canadian Bioceutical Corporation (BCC), a soon-to-be publicly traded firm, and its Nevada subsidiary, CGX Life Sciences, expects its purchase to provide 323 percent year-over-year growth in profits.

Has that expected three-fold annual return prompted you to email Canadian Bioceutical Corporation and be placed on the wait list for its IPO? Then you probably don’t want to be alerted to the fact that Arizona’s medical-marijuana laws dictate that dispensaries be owned and operated by nonprofit companies.

When 323 percent year-over-year growth is on the horizon, those wrinkles can be ironed out, no problem—unless they’re not.

Uncertainty is what makes for risk, and some people thrive on that thrill. If that’s your rush, be clear that you are in it for the adrenaline, like a craps shooter.

But if you’re more a chill-type top-shelf smoker, there’s no reason to settle for stocks that are more trim than shake. Occasionally, you will happen upon a bargain pre-roll that propels you to the stratosphere—but that is an exception and cannot be tracked or predicted.

For a long run, the steady performance of high-quality offerings will more consistently keep you from getting burned.

Thanks to Kindland for the repost.

Allan MacDonell Administrator
Director of Skeeve Allan MacDonell is the author of ‘Prisoner of X’, ‘Punk Elegies’ and ‘Now That I Am Gone.’
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