The Dangers of Investing in Cannabis Stocks

01/06/2016 9:55 am EST

Focus: CANNABIS INVESTMENTS

Michael Berger

President & Founder, Technical420.com

The emergence of the cannabis industry has created opportunities for fraudsters, so Michael Berger, of Technical420.com, shares an example of a pump and dump to illustrate why investors need to be very selective with publicly traded cannabis companies.

The cannabis industry is one of the most rapidly developing and controversial industries in the United States. During the past two years, more 200 cannabis-related companies have gone public through reverse mergers and most of them will be out of business in less than two years. The emergence of the cannabis industry has created opportunities for fraudsters and investors need to evaluate the source of information before investing in a cannabis company.

The regulatory nature of the financial industry restricts broker-dealers from providing information on cannabis stocks and we have seen several new financial research firms enter the cannabis industry. These research firms are not what they present themselves to be. These firms do not provide accurate information and their analysis is completely biased.

These firms accept money or stock from a company, and in return, the company receives a well written research report which is edited by the company before the research firm publishes it. The end result of this transaction is the release of a company report that is full of misleading statements and inaccurate analysis.
 
A Perfect Example of a Pump and Dump

Many of these research firms issue price targets on these companies that are 1000% higher than the stock’s current price. How can you set a price target on a company that does not generate revenue, has billions of shares outstanding, and has no institutional investors?

After researching several publicly traded cannabis companies, we located a press release from March 20, 2015, that is an epitome of this problem. The press release highlights a report written by Wealthmakers.com about IJJ Corporation (IJJP). The press release said the following:

IJJ Corporation (IJJP) today announced that WEALTHMAKERS.COM / www.wealthmakers.com, a Wall Street research and trading firm providing unbiased statistical stock market predictions to empower investors, securities professionals and public company employees to make precise, predictive, and profitable trading decisions, has initiated its coverage today on IJJ Corporation IJJP. The report highlights the short-term bullish pattern that has emerged, the SqueezeTrigger Price of $.0029, and the projected short squeeze valuation of $.1021 per share.”

Always Read the Disclosures

When this report was issued, IJJP was trading at $0.004 a share. IJJP has fallen by more than 94% since then and shares are trading at $0.0002. If you open the report and go to the company disclosures on the last page (click here to download report), you will read the following:

“WealthMakers has received $1,116 per month for data provided six monthly reports. WealthMakers affiliates, officers, directors and employees do not own shares of the company mentioned in this report, but may from time to time buy/sell the shares discussed in this opinion and may profit from those trades.”

WealthMakers claims to be a Wall Street firm that is providing unbiased statistical stock market predictions to empower investors. The nature of the relationship as outlined in the disclosures prove that the firm is biased. WealthMakers is not even a Wall Street firm; the company is based in California.

2015 Was a Rough Year for Cannabis Stocks

We tracked 50 cannabis companies closely during 2015 and the results were not pretty. Out of the 50 stocks we tracked:

  • 30% ended the year in positive territory
  • 6% saw its share price fall by less than 5%
  • 10% saw its share price fall by more than 20% but less than 50%
  • 18% saw its share price fall by more than 50% but less than 75%
  • 36% saw its share price fall by more than 75%

Investors Need to Be Selective

Investors need to be very selective with publicly traded cannabis companies and they should focus on companies that are executing on its business initiatives. When it comes to long-term investments in the cannabis industry, we believe there are only a few companies that represent a long-term investment opportunity. The companies that fall under this category trade on a national exchange, have a characteristic that gives them a competitive advantage, own intellectual property, offer a product that is difficult to replicate, and are led by a management with a proven track record.

Michael Berger, Founder and President, Technical420.com

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