Marijuana stocks have become much more accepted by mainstream investors in the past few years. However, just because investing in cannabis is getting more common doesn’t mean it’s not dangerous territory for investors.
A parade of marijuana stocks has listed on major U.S. exchanges since the beginning of 2018. In addition, a growing number of Wall Street analysts are now covering marijuana stocks. Cannabis investors are no longer automatically smirked at. Unfortunately, there are still plenty of dangers lurking in the cannabis market.
The Dangers Of OTC Stocks
At the same time, U.S. multi-state cannabis operators like Curaleaf Holdings (OTC: CURL), Medmen Enterprises (OTC: MMNFF) and Green Thumb Industries (OTC: GTBIF) are currently relegated to trading on the OTC market. Since these companies are technically running U.S. businesses that contravene federal laws, they will likely stay on the OTC market for the time being.
OTC stocks have a somewhat poor reputation among average investors. Many OTC stocks trade for under $1 per share, and it’s common for OTC stocks to provide little financial information to investors. The information these companies do provide is often unreliable.
As a result, it can be difficult for investors to get a clear picture of what’s going on at companies with OTC stocks. Essentially, all companies need to do to list on the OTC is fill out a request form.
Most cannabis stocks are far from the typical, sketchy, OTC-listed stock. However, that doesn’t mean all the dangers mentioned above don’t still apply to them.
Medmen’s Fake News
Since information about OTC-listed stocks can be difficult to obtain, greedy traders and greedy companies can take advantage of the situation. Companies listed on the OTC markets are notorious for carrying out “pump-and-dump” schemes. Those schemes involve companies or third parties flooding message boards and social media platforms with fake news about a stock to drive its price higher. These companies or third parties will then cash out at the peak, and other buyers of the stock will get burned.
Pump-and-dump schemes are technically illegal. But so is driving over the speed limit, and plenty of people still get away with it. And if you think these types of stock-promotion schemes aren’t used to pump and dump reputable cannabis stocks, you’re wrong.
Seven analysts are currently covering Medmen (OTC: MMNFF), and six of the seven analysts recommend that investors buy MMNFF stock. Yet just last month, Medmen admitted to using an agreement with a company called Winning Media to promote MMNFF stock. In a press release, Medmen said it “disclaims any potentially exaggerated or misleading statements contained in the materials” distributed online by Winning Media. But at that point, the damage to the owners of MMNFF stock may have already been done.
Medmen will likely be particularly careful in the future about the types of public relations deals that it makes. However, given how thinly-traded the OTC market is, stock promoters don’t need companies’ permission to promote stocks. The promoters can simply take a position in a stock, spread fake news online and cash out. The company may be none the wiser.
Avoiding Pump-and-Dump Cannabis Stocks
Fortunately for cannabis investors, there are ways to avoid being misled by promoters. According to Todd Fromer, the managing partner of KCSA Strategic Communications, common sense can go a long way for cannabis-stock investors. Fromer says investors can watch for certain red flags when reading about marijuana stocks online.
First, only trust reputable news sources. A good rule of thumb is to consider whether or not you’ve heard of the website before. For example, a news article on Bloomberg or CNBC is fine. An article on GetRichQuickWithPennyStocks.com may not be.
Second, look for disclosures indicating the article is an advertisement. Finally, use common sense to identify stories that are too good to be true. Actual journalists will almost never make claims like “1000% upside” or “guaranteed profits.”
“As the cannabis sector continues to gain momentum it’s critical that both investors and company management remain vigilant,” Fromer recently wrote.
Marijuana stocks have taken major strides in recent quarters towards leaving their shady past behind. Unfortunately, some U.S. cannabis companies still have a long way to go. In the meantime, just because cannabis stocks are getting much more mainstream media coverage doesn’t mean investors can let their guard down. Don’t believe everything you read about marijuana stocks.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.