Scam Alert: Stay Away From Marijuana Stocks

by Alyssa Oursler | August 21, 2013 1:07 pm

Scam Alert: Stay Away From Marijuana Stocks

As various states across the U.S. have begun legalizing marijuana, potheads aren’t the only ones looking to cash in.

Instead, plenty of investors are looking to roll in some profits from this new industry … which in turn has scammers looking to snag some of their own.

In fact, the Financial Industry Regulatory Authority (FINRA) has issued a new alert warning investors about potential scams in the industry. From the FINRA press release[1]:

“Like many investment scams, pitches for marijuana stocks may arrive in a variety of ways — from faxes to email or text message invitations, to webinars, infomercials, tweets or blog posts.

The con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success. The scammers behind these ‘pump and dump’ scams can then sell off their shares, leaving investors with worthless stock.”

Marijuana stocks are a double whammy, too. Many aren’t just thinly traded and/or nanocap penny stocks[2], which are risks in and of themselves, but are also bets on a fad. Although the marijuana business might have legitimacy down the road, the droves of investors rushing to cash in on it now are simply building on each others’ hype[3].

That won’t last.

We’ve covered both these issues previously at InvestorPlace. Jeff Reeves wrote that[4] “true penny stocks[5] with a small market cap, low volume and a share price of less than $1 are not legitimate investments.” The main reasons: Operations are shoddy; fraud is common; low volume is risky; and the marketing is a scam.

Charles Sizemore looked more closely at the marijuana space[6] in particular, writing that Medical Marijuana Inc. (MJNA[7]) is the “blue chip” of the group thanks to its balance sheet … yet it brought in merely $5 million in revenue during the last quarter of 2012[8]. Meanwhile, Cannabis Science (CBIS[9]) and Growlife (PHOT[10]) are hardly “financially sound.”

The lesson learned in both pieces: Investors have better places they can put their money.

But if nothing else, consider this thought from Gerri Walsh, FINRA’s Senior Vice President for Investor Education:

“Investors considering investing in a heavily touted, thinly traded company should question why a total stranger would tell them about a really great investment opportunity.”

Chances are, it’s not out of the kindness of their hearts.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. FINRA press release: http://www.marketwatch.com/story/finra-warns-investors-of-marijuana-stock-scams-2013-08-20
  2. thinly traded and/or nanocap penny stocks: http://investorplace.com/category/stock-picks/penny-stocks/
  3. building on each others’ hype: http://investorplace.com/2013/02/why-are-marijuana-stocks-growing-like-weeds-right-now/
  4. Jeff Reeves wrote that: http://investorplace.com/2012/01/red-hot-penny-stock-investing-scams/
  5. penny stocks: http://investorplace.com/category/stock-picks/penny-stocks/
  6. looked more closely at the marijuana space: http://investorplace.com/2013/05/marijuana-stocks-none-of-tobaccos-sinful-qualities-just-smoke/
  7. MJNA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MJNA
  8. merely $5 million in revenue during the last quarter of 2012: http://www.medicalmarijuanainc.com/images/Pdf/2012-Annual-Report.pdf
  9. CBIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBIS
  10. PHOT: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHOT

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