Marijuana Stocks: Is This the Pump Before the Dump?

Stock Market


The great marijuana gold rush is in full swing, and investors are scrambling to get their hands on some equity while it’s still cheap. Marijuana industry stocks — mostly trading over the counter and for fractions of a dollar — have surged anywhere from 20 to 1,700 percent over the past few weeks, catalyzed by the legalization of recreational weed in Colorado.

The frenzy was inevitable. Businesses have been positioning themselves for years, each trying to be a leader in an industry that is expected to be worth billions of dollars in the coming years. Marijuana sales reportedly averaged about $1 million per day in the first five days of legalization in Colorado, and policymakers are expecting full-year 2014 sales of about $600 million. The market in Washington state, which is expected to legalize the retail sale of weed this year, is projected to be at least as large, if not larger. One study cited by the Huffington Post predicts a $10 billion market in the U.S. by 2018.

It’s a big pie that’s only expected to get bigger. Bloomberg Industries estimates that national legalization could open the doors to a $30 to $45 billion a year industry. Jamen Shivley, a founder of Diego Pellicer, puts the market closer to $100 billion.

As the story usually goes with pies, everybody wants a piece (THC, the primary psychoactive ingredient in weed, is fat soluble, so don’t categorically rule out marijuana pastries). The challenge that investors face is to pick the good pieces from the bad, and they have to do it in a frenetic jungle of incomplete information and hype.

On August 20, the Financial Industry Regulatory Authority (or, FINRA) issued an alert to investors warning them about potential scams associated with marijuana-related stocks. Specifically, FINRA warned about the well-known ‘pump-and-dump’ scheme, in which, “fraudsters lure investors with aggressive, optimistic — and potentially false and misleading — statements or information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success (the pump).

“Once share prices and volumes reach a peak, the cons behind the scam sell off their shares at a profit, leaving investors with worthless stock (the dump).” The price action of marijuana stocks across the industry right now could very well qualify as the pump part of this equation.

To be clear, not all marijuana-industry stocks are created equal. Some are fully reporting, some are not — some operate on a picks-and-shovel model, some simply do research and development. Here’s a quick overview of some of the industry players.

Company Market Cap Trailing twelve-months revenue TTM Price-to-sales ratio
Growlife, Inc. (OTC:PHOT) $184.01 million $3.61 million 68.93
Terra Tech Corp. (TRTC.OB) $26.30 million $1.66 million 22.60
Hemp, Inc. (HEMP.PK) $46.12 million $28.14 thousand 2,159.02
Cannabis Science, Inc. (CBIS.OB) $111.91 million $75.19 thousand 1,199.83
Medical Marijuana, Inc. (MJNA.PK) $184.78 million n/a n/a

Furthermore, here’s how they have traded over the past three months.