Pot Penny Stocks

The Recent Pot and Marijuana Penny Stock Mania

Woman Smoking Pot
Woman Smoking Marijuana. Stock Shop Photography

Months ago, any company with the word "cannabis," or "marijuana" in their name was soaring in price.  In fact, the pot craze grew to such extremes that some businesses, little bigger than a glorified lemonade stand, were valued at hundreds of millions of dollars.

In fact, it didn't seem to matter that one company had been a failing mining venture only a few weeks earlier, or that others had never squeezed out a single cent in revenue.

  Nor did it matter that recreational marijuana was still illegal nation-wide.  

All that investors seemed to focus upon was the widely held belief that the laws were about to change.  That possibility was enough for a deluge of money to chase every cannabis penny stock into the stratosphere.

Now this story is not all bad - once legalized recreational marijuana hit the streets in Colorado, crime rates dropped 14%, and homicides fell by 67%, all within the first two months.  Also, while the tax revenues generated fell short of the $130 million expectation, there were plenty of dollars flowing to the State.

We will avoid naming too many pot penny stock names, since this was after all an industry-wide investor stampede.  The rising tide lifted all boats... well above sea level!  

We will, however, point out a few of the most notable examples.  Cannavest (CANV) had a total company value of $800 million at one point...

 while even today they are reporting only about $10 million in revenues per year

Medbox (MDBX) and Growlife (PHOT) both peaked at over $400 million in company value, based on their share price, but a quick Leeds Analysis review easily identified that they would have an impossible time justifying that stock market valuation.

These are by no means the worst examples, since these companies actually did have a business and products.  Other pot penny stocks simply mentioned they were in the industry of "consulting" to the marijuana companies, and even without assets or sales they saw their share price spike dramatically.

Of course, the trading price of any stock is usually not elated to the operations of the company, but rather the exuberance of investors.  If thousands of people buy a company's shares, the price will go up, whether the management team likes it or not.

The investor stampede was so great that the prices of many of these marijuana-related businesses exploded from pennies to several dollars per share.  People didn't seem to care that the pot penny stocks were bleeding cash by the tens of millions, and were saddled with unpayable debt loads.  What is worse is that the masses didn't even take the time to look.  

Like all stock market manias, this particular frenzy came to an end.  As is the case with every investor stampede, people gobble up shares until they can't swallow any more, and then the shares fall.  This is by no means a unique story, or a surprising outcome. 

Spoiler Alert:  it will happen the exact same way again next stampede, just as it has with Bitcoin, the Dot Com bubble, the Gold Rush, the Dutch Tulip Bulb Mania, Occupy Wall Street, and dozens of other social stampedes.

The pot penny stocks would inevitably fall (despite what every believer would adamantly argue), and fall they did.  Investors late to the game, which in any mania is the majority, paid for shares of stock right at the peak, only to see 95% of their investment obliterated within the following months.

If you were to ask 99% of these investors a few simple questions, they would not have the answers for you.  What is the name of the CEO?  How much debt does the company have?  How many employees work there?  Even after putting thousands into some companys' shares, most people wouldn't know where the business was located.

There are so many lessons to be learned here, and one over-arcing moral.  

  •  never chase the current "hot" trend
  • do extensive due diligence into any company in which you plan on investing
  • call the company and ask questions
  • never invest in an "idea" or "concept," but instead look at every share as a part of a business
  • don't do what the crowd is doing, especially in the stock market
  • a story all over the media is closer to the end than the beginning
  • dirt is still dirt, and mud is still mud, even if everyone is trampling each other for it

However, to sum the pot penny stock craze into a single thought, consider this:

A stock market mania can override reality for months, but never for years.