by Dan Burrows | April 2, 2014 1:57 pm
There’s nothing chill about marijuana stocks. Marijuana stocks trading over-the-counter — which is always a red flag — are racking up the pennies to post some astonishing gains.
And each and every one of them is a sell.
This is a speculative bubble based on misunderstanding and ignorance, and it’s going to pop one day.
Marijuana stocks might — might — make sense if you’re a gambler (a gambler with a serious problem). Speculation is a legitimate activity, and many professionals do very well by speculating in currencies, commodities and other assets.
But it’s a well-worn saying on Wall Street that you should never speculate unless you can make it your full-time job.
That’s because if you play blackjack long enough, you lose. The odds are in favor of the house and the laws of probability will catch up to you. The same goes for so-called marijuana stocks.
Even worse for anyone speculating in marijuana stocks is that almost all of them don’t even trade on major exchanges like the NYSE or the Nasdaq, thus they’re not under the types of exchange guidelines that help validate a business and give it transparency. And if marijuana is one day legalized at the federal level, do you really think the giant tobacco companies will forfeit the market to some tiny upstart?
Finally, many of the bullish arguments for marijuana stocks are just plain wrong.
Sorry, but marijuana stocks are not serious. They could even turn out to be pump-and-dump schemes. There are nearly two dozen stocks connected to or trading on medical marijuana. Here’s a look at four of the largest medical marijuana stocks — and why you should run from them without looking back:
Never mind that Forbes published a detailed and disturbing analysis of CannaVest (CANV), a marijuana stock that sure looks like a shell game. It barely has a business. Annual revenue came to $2.2 million last year. CannaVest said it had a “gross profit” of $1.3 million but it doesn’t explain what that means. Meanwhile, selling general and administrative expenses of $2.4 million, and the whole ball of yarn comes out to a net loss of $2.3 million.
Oh, and CannaVest had no revenue for 2012.
Shares in this so-called marijuana stock are up just 21% for the year-to-date to trade at $33 a pop. That’s after tumbling from a high of $165.
CannaVest isn’t even a marijuana stock. It has no connection to medical marijuana at all. This so-called marijuana stock sells health and wellness products made from hemp. Hemp is a cousin of marijuana (cannabis), but it’s used to make things like rope and oil.
Furthermore, the cannabidiol extracted from hemp might have therapeutic uses, but it’s still illegal under federal law. CannaVest is taking advantage of a gray area in the law in order to work with cannabidiol at all.
CannaVest has nothing to do with medical marijuana. It has no net income and paltry revenue. And yet the market cap is more than $1 billion. If that doesn’t strike you as odd, you might as well just set fire to your money.
Medical Marijuana (MJNA) has a great name for sucking in anyone looking to play the legalization of marijuana with marijuana stocks. That alone drives demand, facts be damned. MJNA is up almost 90% for the year-to-date.
The nominal price (29 cents per share) alone should scare any reasonable person away, but there are other problems with betting MJNA as a marijuana stock — and that’s after the fact the president stepped down after a federal grand jury indicted him as part of an alleged $10 million mortgage fraud.
Like all these marijuana stocks, MJNA took off after Colorado and Washington state legalized weed. But MJNA derives no income from this legalization at all. Like CannVest, it sells oil and gum based on hemp. It’s another marijuana stock that has nothing to do with marijuana. Indeed, MJNA has said it won’t consider selling cannabis until it’s legalized at the federal level.
And since when does it make sense for a company with “gross” income of approximately $8.1 million to have a market cap of $270 million?
GrowLife (PHOT) seems to make sense to a lot of people. It sells gear needed to grow marijuana in your garage or garden. And unlike the others, this really is a marijuana stock. PHOT took off on the legalization of marijuana in two states, and it’s up 300% for the year-to-date, trading at 61 cents a share.
If anything, PHOT should have sold off on the legalization news.
If marijuana becomes legal, why would anyone need to grow their own in a closet lined with tin foil? Folks who grow their own marijuana do so precisely because marijuana is illegal. Once it’s legal, you’re better off just popping down to the pot store.
PHOT has a market cap of $440 million — and no profits. PHOT had an adjusted net loss in 2013 of $2.2 million. Indeed, PHOT has never turned a profit. It only loses greater amounts of money every year even as sales grow.
Speaking of sales, annual revenue came to just about $5 million, and that was driven by loads of acquisitions — not by selling more product.
Cannabis Science (CBIS) more than doubled for the year-to-date to trade at a 16 cents a share. It must be the name driving the share price, because it sure isn’t the legalization of marijuana.
Cannabis Science has nothing to to with growing, selling or distributing medical marijuana. Rather, it’s trying to develop medications based on cannabinoids to treat everything from autism to cancer to HIV. It’s like an ambitious and goofy biotech — cancer and HIV? — not a medical marijuana stock.
As for legalization helping its business, well, that doesn’t enter into it. Real scientists working in real labs have no trouble getting hold of cannabinoids for research purposes. Meanwhile, CBIS doesn’t have any drugs in the pipeline. Both its cancer and HIV programs are still in the pre-clinical investigation stage. That means they exist somewhere on a white board.
Little wonder then that CBIS has no profits. Hell, it barely has revenue. From 2005 to the end of 2012 (the last date for which data is available) revenue totaled $127,000. That’s cumulative.
And for all this, CBIS has a market cap of $123 million.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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