Is there dishonesty in the market? Oh yeah, there is plenty of it. In fact dishonesty has been in the markets for so long that it has almost become an artform. It is crude too. Like all predators, dishonesty seeks out the weakest most vulnerable sectors of the market. Right now, dishonesty is sniffing out the cannabis sector (and yes that pun was fully intended) because it is young and inexperienced relative to mainstream sectors.
One of the vulnerabilities of the cannabis sectors is that so many of its stocks are over-the-counter, penny stocks and pink sheets. These are the sectors the vultures are always roaming anyways. Please understand that money can be made in penny stocks, but a lot can be lost as well. If you add in a manipulation variable to these companies whose futures are so uncertain and you have the ingredients for mayhem.
A most recent example is Jeffrey Friedland who hid from the public that he owned a large amount of OWC Pharmaceuticals (OTC: OWCP), an Israeli company that conducts medical marijuana research and does some consulting on the side. OWC Pharmaceuticals hired Friedland in 2014 as an adviser and awarded him a great deal of their very affordable stock. He then continued to acquire shares up until the beginning of 2017 when he started to improperly tout the stock without properly disclosing his own large stake in the company. Coaxing unknowing investors to buy into the small company brought its share price from roughly .10 cents a share to around $3.00 in just a few months. Friedland then sold his stock for a tidy $7 million gain which left OWC Pharmaceuticals shares trading back down around the .20 cent mark. This is as classic of a pump and dump strategy as you can get. This crude but effective and illegal strategy is fairly common in the cannabis sector.
In fact penny stocks get pumped up frequently enough that honest traders have come to expect them and have even created specific strategies to trade them. Let’s take those traders’ ideas on how to identify a pumped up stock but for the purposes of helping people interested in marijuana stocks avoid them.
It is pretty common sense stuff, if a cannabis company is being promoted hard and there is lots of talk of how much money investors will make, be very wary. Buy the rumor sell the fact? No, avoid rumors, especially ones about the future. If a marijuana stock has been trading in the same tiny range for a long time, let’s say below .10 cents, and then suddenly the share price is leaping up 300%, 500% or even more with tons of volume suddenly pouring in, that is a bad sign too. No company can sustain growth like that over any extended period of time, nor does promoting a company create a long standing business model that can nurture and grow a company. In my opinion, if someone wants to trade short-term moves in any stock, including marijuana stocks, they need to use technical analysis and math. Even the most disciplined minds with the most elaborate mathematical strategy can still lose money though.
There are other dishonest acts occurring in the cannabis sector. In the OWC Pharmaceuticals example, that company was being taken advantage of along with the traders that anxiously bought into the fast rallying stock not wanting to miss out. Sometimes though, it is the company that is being dishonest. FINRA, the Financial Industry Regulatory Authority, even posts on their site a link to the Federal Bureau of Prisons Inmate Locator so that potential investors can look up the owners and high ranking employees of companies because so often the people hired cannot be trusted. Companies have touted false returns and so the logical thing for a marijuana stock investor to do, is research. Do not take anyone’s word for anything. Here is a link to lookup a company’s SEC filing at the SEC’s EDGAR database. But, do not get your hopes up, you will not find many cannabis companies there.
If a cannabis company is putting out press release after press release, that is a tactic to gain investor interest as well, but it does not mean that company has a sound product with a sound business model. Look out for shell companies that are in place for reverse mergers as well. A reverse merger can be a clever way to get your company publicly traded without jumping through IPO hoops that come with a lot of cost. But the shell company can be easily manipulated.
The SEC has a site, Investor.gov, that provides all sorts of search tools for investors to educate themselves on a company’s background. They also post an Investor Alert: Marijuana Related Investments section which lists companies that are in trouble and have been suspended. The last time the Marijuana Related Investments section was updated was 2014, which I take as a good sign. There you can see some great examples of some marijuana stocks that have crossed the line for providing false information to the public or outright manipulation of their own stock. GrowLife Inc. (PHOT) was suspended in 2014 for providing inaccurate information to the public about their company and potentially manipulative transactions on their common stocks. GrowLife Inc. is a real company and sometimes companies make mistakes and get suspended for being dumb rather than malicious intent.
Manipulation and fraud in the markets does not only exist in penny stocks and over-the-counter equities. Investors should always research companies closely before risking their money in any market. There is an intense amount of anticipation in the cannabis sector. Canada is on the verge selling recreational cannabis and there is a huge surge here in the U.S. towards marijuana legalization. 2018 is looking to be a big year for states adopting new medical and recreational cannabis rules as well. Cannabis investors should be careful letting their enthusiasm get the better of them. An investor should have multiple, well thought out reasons for purchasing any sort of company.
If you want to invest in marijuana stocks, just know that a lot of the available resources for researching large mainstream companies simply do not exist in the cannabis sector. Cannabis is still illegal federally and that makes working with any national financial network nearly impossible. So, there are not a lot of SEC filings and there are not many cannabis companies trading on the more reputable exchanges. That is simply something that any potential trader or investor interested in marijuana stocks has to accept before risking their money. Cannabis is a booming sector and I do not believe it is going away, so the opportunities do exist in my opinion. In order to have a chance at taking advantage of those opportunities, in-depth research and objectivity are necessary.