Why Investors Should Avoid Marijuana Stocks

While the legal landscape of marijuana may soon yield a vast industry, it's simply too early for prudent investors to get involved.

Apr 5, 2014 at 3:00PM


Marijuana is popular. It's fully legal in two states and the majority of Americans believe that'll soon be the case nationwide. But this doesn't mean investors should jump head first into the industry.

In the middle of last year, the Financial Industry Regulatory Authority warned investors that "con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success."

Known as "pumping and dumping," this is an old trick on Wall Street. Most recently, it was even the subject matter of a best-selling book and Oscar-nominated movie starring Leonardo DiCaprio. The subject of both was Stratton Oakmont, a Long Island-based boiler room that manipulated the price of microcap stocks in order to turn a profit.

Whether this same type of activity, or one of equally dubious nature, is now affecting cannabis stocks is impossible to say with certainty. Yet there's enough evidence of speculative frenzy, if not intentional malevolence, that investors would be wise to steer clear of associated stocks.

In the first case, many of the companies are trading for ridiculous valuations despite having little to no actual businesses behind them. CannaVest serves as an apt example. As a commentator on Investorplace.com recently observed, while its annual revenue came to $2.2 million last year, its selling and general administrative expenses added up to $2.4 million. Despite this, the company claims to have a "gross profit" of $1.3 million.

Along these same lines, some of these companies found their way to the public markets via reverse mergers, which allows them to avoid the regulatory scrutiny of an initial public offering. It's a backdoor to the equity markets, and, as a general rule, companies that employ it should be avoided like the plague.

Finally, if there was any doubt about the propriety of these companies, the recent decision by the Securities and Exchange Commission to halt the trading of shares in Advanced Cannabis Solutions, which trades on the over-the-counter market under the symbol CANN, should put said questions to rest.

To be fair, the company and its executives, two of which I spoke to earlier this year during research on an in-depth series on the industry, deserve to be given latitude until the SEC looks into concerns that "undisclosed affiliates and shareholders" unlawfully distributed the company's stock. But I, for one, wouldn't be interested in sitting around and waiting to find out. Not with Advanced Cannabis Solutions, nor any other company in the industry.

In short, it's simply too early for these companies to go public. The perils and uncertainty are too high to hoist onto the public equity markets. And, as a result, the extreme risk, and for that matter extreme reward, should at least for the time being remain with private investors who have the knowledge, wherewithal, and on-the-ground access to the companies themselves.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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