Medical marijuana stocks are back in the news now that Washington state’s first recreational marijuana stores are opening for business, but that doesn’t make medical marijuana stocks safe to invest in.
Although there are scores of medical marijuana stocks to choose from, they all tend to share risky characteristics that make them dangerous no matter what happens in Washington state — or Washington, D.C.
That means medical marijuana stocks are not subject to the same kind of regulatory requirements of stocks listed on a major exchange.
The lack of oversight helps make the OTC market a playground for scam artists running pump-and-dump schemes. Sure, there are legitimate penny stocks, but a lack of regulation — of audited financial statements and other data — makes it hard to know if medical marijuana stocks are on the up-and-up.
Then there’s the problem that penny stocks like cannabis stocks are illiquid. That means, when it comes to price, they bounce all over the place. Indeed, medical marijuana stocks are tremendously volatile, which increases the risk that you will buy high and sell low.
A lack of liquidity also means you may not be able to find a buyer when you want to sell your stocks at a certain price.
Also worrisome, a number of medical marijuana stocks have been temporarily suspended from trading by the Securities and Exchange Commission. The SEC typically makes such moves when it’s concerned about the possibility of fraud.
Needless to say, even if the SEC finds nothing wrong, any suspension of trading is not good for medical marijuana stocks when it comes to price.
Lastly, most medical marijuana stocks are wildly overvalued. True, many new and promising companies like those represented by medical marijuana stocks don’t have any profits yet, so it’s not necessarily fair to value them by earnings.
But there are other measures — like the price of medical marijuana stocks compared to their revenues — that also show them to be extremely overvalued.
As exciting as the opportunity in medical marijuana stocks might look, at this point they’re still too good to be true.
These stocks are risky gambles at best. In some cases, they could even be scams. The best advice is to stay away from medical marijuana stocks.