22nd Century Group (NYSE:XXII) is placing a bet that people will smoke tobacco (and maybe marijuana) even if it doesn’t make them high. After a drop in mid January, XXII stock has regained some lost ground to be up 2.41% for the year so far.
The company, which is based near Buffalo, NY, has a market cap of $317.2 million. It’s on pace for revenue of $19 million when it reports 2018 results next week, up from $16.6 million in 2017 and $12.4 million in 2016. Losses are about equal to the revenue number.
The company’s technology creates very low nicotine tobacco which has been used in medical research, aimed at finding whether it can help people stop smoking.
A home run for 22nd Century would be bringing such tobacco to market. It’s seeking an FDA Premarket Tobacco Application (PMTA) for the purpose. It filed the application in December.
If you’re buying 22nd Century stock, you’re betting the approval comes through and that the company can sell the product, or at least that management can sell the company.
Seeking Highs in the Lows
CEO Henry Sicignano has been working this patch of business ground since 2010. At last report he owned 4.09% of 22nd Century, a stake worth $12.8 million. He was previously marketing director for a specialty tobacco company sold to R.J. Reynolds in 2002.
In addition to researching low-nicotine tobacco, 22nd Century is researching low-THC marijuana. Because of its low market cap and share price, XXII stock is prone to wild swings based on hype. The spikes lead to short squeezes, then sudden falls in the stock price, and the inevitable flurry of charges of manipulation and resulting lawsuits.
While the company is technically based in New York, most of its employees are in Mocksville, North Carolina, outside Winston-Salem, so its applications make news there.
If the FDA approves the PMTA, 22nd Century would be allowed to mass produce its tobacco and offer it for sale, possibly as part of a smoking-cessation effort. If you believe the agency’s nod is likely, it makes sense to buy the stock, because at a minimum 22nd Century could then become a buyout target for a large tobacco company, like Altria (NYSE:MO).
That’s the theory, anyway.
Pump and Dump on XXII Stock
In September, a short seller dubbed “Fuzzy Panda” wrote of suspected Securities and Exchange Commission (SEC) action involving 22nd Century. This may have involved phony articles from people working for Barry Honig, whom the SEC has called a “microcap fraudster” .
Investigation reporting website Sharesleuth has accused promoters of operating a “stealth promotion network” on financial web sites. The promoters buy a block of shares, confederates write in praise of the company in question, the stock’s price rises, then the shares are dumped.
Shares in 22nd Century did indeed rise through 2017, the period where the articles are said to have come out. Shares peaked in January 2018 at almost $4 each. Since that peak they have mainly traded in a range of $2-$3 per share. They opened for trade on February 15 at $2.52.
Bottom Line on 22nd Century Stock
A fool and his money were lucky to get together in the first place. Thus, I avoid low-valuation stocks that can be subject to manipulation. It is better to get rich slowly than to go broke all at once.
If an idea is good, venture capitalists or private equity people will lead the company forward to a public offering at a reasonable valuation, based on revenue and earnings.
A company with reported revenue of $19 million does not deserve a market cap of $313 million. An exception may be made for a drug stock that is about to hear something great from regulators.
I may be wrong, but I don’t believe that to be the case here.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.