Top Marijuana Penny Stocks
There has been a lot of focus on marijuana penny stocks lately. It is because many of them have doubled or tripled in price at points over the past few years. These large moves have mostly been predicated on investor belief that there will be an opportunity for marijuana and pot companies to succeed as more states legalize hemp, CBD oil, and marijuana for medicinal and recreational purposes.
Like Colorado, many states are slated to legalize marijuana based on popular referenda, and more plan to add it to the ballot in coming years.
There is an old expression that says nothing can stop an idea whose time has come, and for the legalization of marijuana (based on the social outlook), it appears that municipalities have become much more open to the benefits, and less concerned about the risks. Because popular opinion now increasingly favors legalizing pot, many people anticipate that the government will become much more open to the concept of the legalization of recreational marijuana in the near future.
When Colorado originally took the first step to legalize recreational marijuana, they became the first state to do so, a move which was monitored very closely by many other local and state governments. After the legalization, Colorado's crime rate has dropped, vandalism rates decreased, and revenues started flowing in from taxation and pot tourism. It turned out that marijuana was not functioning as a gateway drug after all, nor did it result in the deterioration of social values.
However, you need to distinguish the difference between companies directly or indirectly involved with the marijuana "concept," and companies which are worthy of investing in because they represent compelling value.
There is a difference!
An inability to spot those differences will result in just about every "marijuana penny stock investor" losing the majority of their money. In most cases that will happen pretty quickly and soon.
To give you an idea just how horrible the majority of these dramatically-overvalued recreational marijuana penny stocks have become, we decided to take a look under the hood of many of them. Here are some of the top pot penny stocks which are being gobbled up by shareholders right now, and a snapshot of their underlying train wrecks in their financial statements.
General Cannabis Corp. (CANN — OTC-QB)
Here is a stock which has increased pretty significantly, from $0.75 in 2016, to as high as $8.00 a share in early 2017. Shares have since settled at around $2.25 as of early 2019.
CANN Trades OTC (over the counter) which means that it is not listed on a traditional stock exchange like the New York Stock Exchange or NASDAQ. Based on our analysis, the shares may not be so hot. Here's why:
- The shares increased in price in-line with the dramatic run-up in trading activity. Thousands of people feel (all the same time) that there may be some upside to cannabis-related companies. However, as you see the trading activity and interest dramatically dropping off, the shares will begin to move lower, just as we explained in this video.
- As well, during the price run-up over the last couple of months, the money flow demonstrates that there's about $16 million in fresh cash coming into this tiny, obscure company. Without that influx of money, the shares have nothing to hold them at current levels. Therefore, as the money starts to slosh back out of this investment, the shares will drop significantly lower.
Just like most businesses that pretend they are loosely related to cannabis, CANN explains that they are involved with consulting, advisory, marketing, and management services to the marijuana industry.
In other words, and to put it simply, they do not have a clue as to what they're doing. All they know is that they got the word "cannabis" into the name of their company, and they are benefiting from the miniature stampede which we are seeing across the entire industry right now.
CANN is a company that brought in just over $3.5 million in revenues for fiscal 2017, over which period they lost $8.2 million as a net loss. The company has not yet turned a profit since it was founded. In the longer term, they have more total liabilities than they have in total assets.
It means that even if they liquidated every single thing they owned, including pens, paper, and coffee cups, they would still be worth less than some negative value. Because of this, we feel that CANN is potentially overvalued.
GreenGro Techs (GRNH — Pink Sheets)
Here's another one that has tripled in price over a period of weeks in its past, but has since trended down toward zero where it trades at just 2 cents per share as of early 2019, which could be cause for concern.
The chart for GRNH mirrored CANN up until 2018, and when the entire industry is acting the same! You know that the price moves are not based on the underlying companies, but rather are being moved by the stampede surrounding the overall concept.
The difference between a concept and a company is that the company could find a way to make enough money to justify their share price. On the other hand, a concept alone will typically not be strong enough to justify current share prices.
In other words, the stocks are increasing because of the underlying idea of legal marijuana. There is no value there or reason for the increase in the price of the specific penny stocks.
Having fallen slightly from recent highs, this particular marijuana penny stock has a lot further down to go perhaps. Just like CANN, the trading volume had increased significantly, which helped push the share price much higher. As that trading activity (and investor interest) subsides, the investment value will crumble.
GreenGro is simply just one more cannabis-related company sitting on a train wreck with their financial results. In 2017, the company only brought in $1.5 million in total revenue.
Over this time, however, GRNH lost $8.2 million, even after their sales. The year prior to that they lost over $3 million. Since inception, this company has seen nothing besides cash bleed.
When we look at their income statement from a closer perspective, GRNH only had $101,000 in sales in the most recent three-month period. It worked out to an operating loss of $1.3 million. Anyone who understands business will understand that to lose $1.3 million, after making only $101,000 in revenues, is very hard to do.
So let's take a look at the balance sheet. There must be a pretty strong cash position there to justify the current share price, right?
The entire corporation's current assets are less than $2.1 million. Their current liabilities are twice that at $4.2 million, so from that perspective, GRNH is actually in about the same shape as most marijuana companies.
However, this does not mean that the stock is fairly valued even at the current price. GRNH might be destined to go bankrupt. Based on the current trends, these guys may not have a hope to do anything other than reach zero cents per share in my opinion.
Aurora Cannabis (NYSE: ACB)
Aurora seems to be doing quite a bit better among marijuana stocks. Specifically, the shares have increased more than tenfold entering 2019 from just three years prior. It is also listed on the New York Stock Exchange, lending some credibility to investors.
However, like all other cannabis companies right now, the shares may be dramatically overvalued. Meanwhile, the financial situation of the company is tenuous.
In 2018 Aurora brought in an impressive $55.2 million in revenue, up from just $1.44 million in 2016. Due to a one-time increase, the company actually had a positive net income in 2018, after years of losses before.
The balance sheet also looks better than the ones above: $150 million in current assets and only $75 million in current liabilities. Aurora may be well positioned to be a top pot stock in the years to come.
Aphria (NYSE: APHA)
It is not to say that all marijuana-related companies are bad investments. Unlike many cannabis-wannabes, Aphria is actively producing hydroponic cannabis with the help of the Canadian government and selling it for medical use. APH, as well as a lot of cannabis companies which are backed-up by the Canadian government, may be around for many years going forward. APH's shares have risen six-fold between 2016 and 2019.
It is decidedly unlike the fly–by–night pot penny stocks out there on the dark markets, such as those which trade on the Pink Sheets, OTC-QX, and OTC-QB.
Investing well has to do with owning shares in companies which are growing fast, are financially secure, and expected to expand their market share rapidly. They need to have the wind at their backs, as well as a loyal client-base that supports their recurring revenues while taking on larger order sizes.
Many of the Canadian-based pot companies can lay claim to such price drivers, and as such should be able to harness the current shift in the social fabric in North America. It will help to keep the upward momentum going.
Your first step should be to check if a cannabis-related publicly traded company is listed upon the Pink Sheets, the OTC-QX, or the OTC-QB. In such a case, walk away from the investment immediately, and save your money.
Canopy Growth Corp. (NYSE: CGC)
The trading chart of Canopy Growth Corp. looks similar to the trading charts of the other cannabis-related companies we mentioned earlier over the period 2015-2016. But then the stock has gone up nearly 30-fold since then into the beginning of 2019. The difference between CGC and most of the others is that they generate a significant level of revenues and have low costs.
This is another company which is based out of Canada, and as such has numerous advantages which will help keep the company running along nicely. They increased revenues to nearly $80 million in 2018, up from just $12.7 million in 2016. However, even after the massive jump in revenue levels, they still lost a whopping $70 million in 2018.
One aspect of this company which they have going for them, in which you will only find with some of these financially secure Canadian penny stocks, is their balance sheet. They boast nearly half-a-billion dollars in current assets and $1.52 billion in total assets. It compares favorably to the $92 million in current liabilities and the $234 million in total liabilities.
As long as they can maintain these growth levels, backstopped by a very strong balance sheet and financial position, shares of Canopy Growth Corp. are much more fairly valued than just about every other marijuana-related company out there right now.
What Happens Now?
People believe that marijuana is growing in popularity, and that it will become increasingly legal in the United States and elsewhere, so they assume that means that marijuana-related companies should increase in price. But they should be cautious nonetheless.
If investing were that easy, more of us would be rich. If surmising the direction of stock prices was so simple, we would all make a lot more money investing than we do.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.