If this doesn’t get you to dump your so-called “medical” marijuana stocks, then you deserve to lose your dough.
Trading in GrowLife (PHOT) has been suspended by the Securities and Exchange Commission because the regulator is concerned about “questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in PHOT’s common stock.”
That’s a polite way of saying they’re worried about potential securities fraud.
What a surprise.
Like all of the scores of marijuana stocks, PHOT is a penny stock that trades in the over-the-counter market.
Trading OTC in and of itself doesn’t make PHOT stock bad — several legitimate foreign blue-chips such as Nestle (NSRGY) do the same thing. But the problem with the OTC market is that there’s no way to tell the good guys from the bad. A lack of oversight makes it a haven for pump-and-dump scammers.
That’s why the Financial Industry Regulatory Authority (FINRA) has been warning investors for months to be wary of the potential for fraud in marijuana stocks. From FINRA:
“The CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history. The former CEO of a similar company was recently indicted for his role in a multi-million dollar mortgage-based Ponzi scheme.”
It’s important to note that the trading halt in PHOT does not mean it’s a scam. But it sure isn’t good news for PHOT stock holders, who can’t do anything until the suspension ends April 25. (Unless the SEC does find something that leads it to extend the trading stop, in which case all bets are off.)
We’ve been warning investors to dump medical marijuana stocks for this very reason — they’re dodgy! — among others. We’ve been especially skeptical of the most popular marijuana stocks, including PHOT, Medical Marijuana (MJNA), Cannabis Science (CBIS), CannaVest (CANV), MediSwipe (MWIP) and GreenGro Technologies (GRNH).
The thing is, even if these marijuana stocks are on the up-and-up, not one of them has the revenue, profit or financial projections to justify their crazy-high market caps.
That is to say: Even if they’re not scams, they are insanely overvalued.
PHOT has too little revenue to justify its $400 million market cap. That is a huge red flag that something is off. And it’s not just true for PHOT stock; it’s the case for all these names.
Companies like Growlife — with little or no revenue, zero profits and extremely suspect growth prospects — are not worth tens of million or hundreds of millions of dollars. At least not based on the information made available to investors. Capitalism and the stock market do not work that way. That means even that if they’re honest, PHOT, MJNA, CBIS, CANV, MWIP, GRNH — you name it — are going to crash and burn at some point.
It’s also critical to remember that PHOT isn’t the first marijuana stock to come under regulatory scrutiny. Advanced Cannabis (CANN) just resumed trading after an SEC halt and immediately plunged 40%. You can just imagine the carnage in PHOT stock when it resumes trading in a couple of weeks.
And then get the hell out.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.