Marijuana stocks are always too hot to hold, but some of the biggest names in the sector can really torch a portfolio when the market is in risk-off mode.
For one thing, stocks that trade over-the-counter are inherently risky because they’re not subject to anywhere near the level of regulatory oversight given to securities listed on the major exchanges.
True, plenty of blue-chip foreign companies — Nestle (NSRGY), for example, or Samsung (SSNLF) — choose to list their American Depositary Receipts on the over-the-counter market. But most penny stocks are hardly storied multinational corporations. And they are certainly not worth the risk. Even the Securities and Exchange Commission says so.
Marijuana Stocks: The Worst of a Bad OTC Lot
Marijuana stocks, in particular, are riskier than your average penny stock because of the attention they’re getting from retail investors — as well as federal regulators. The SEC has investigated a couple of marijuana stocks for suspicious trading activity in the past year already.
Too many marijuana stocks look too dodgy to bother with, but that’s not all. Even if marijuana stocks are on the up-and-up, not a single one of them has the revenue, profit or financial projections to justify their crazy-high market caps.
That is to say: Even if marijuana stocks are not scams, they are insanely overvalued.
They are also illiquid. That means it can be hard to find a seller when you want to buy at a certain price, and — much worse — impossible to find a buyer when you want to sell at a certain price.
Add it all up, and some of the biggest marijuana stocks by market cap develop some truly ugly charts when the market goes into risk-off mode — as it has been recently.
The S&P 500 peaked with a record-high close on Dec. 5. Since then, the broad market lost 5% through Tuesday’s close. That’s a steep selloff. In technical terms, it’s halfway to an official correction.
Most of the biggest marijuana stocks we track fared significantly worse than the broader market when it went risk-off. Medical Marijuana Inc (MJNA) — when it even traded at all — tumbled 7% over the same span. GrowLife Inc (PHOT) — a marijuana stock with almost no liquidity since having its trading ban lifted — fell 25%.
And so-called marijuana stock Cannabis Science Inc (CBIS) dropped 13% from the most recent broad-market peak.
True, CannaVest Corp (CANV) — an incredibly suspicious marijuana stock, according to reporting by Forbes — rallied 8% as the broader market tumbled from Dec. 5 onward. Too bad CANV stock is still down 90% for the year-to-date.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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