While regulators warn of scams, some of the biggest percentage gains in the stock market this year are being harvested by investors speculating on marijuana penny stocks.
Among 10 marijuana-related stocks that have rallied more than 20 percent this year, most are priced below $1 and trade over the counter.
The budding interest in the industry is being fueled by recent changes in state marijuana laws, analysts said.
Colorado recently became the first state to legalize marijuana sales to anyone 21 and older, and New York considered reviving a law to allow some hospitals to use the drug for patients with cancer, glaucoma and other illnesses. In Alaska, state officials are certifying signatures on a proposed ballot initiative to legalize marijuana. If enough signatures are verified the question will go before voters in the Aug. 19 primary.
Bruce Perlowin, the chief executive officer of Hemp Inc., who has seen the com-pany stock soar 205 percent to 8 cents in the past three days, said investors are suddenly bidding up marijuana companies because they want to find “the next Microsoft.”
“The demand for marijuana is insatiable,” said Perlowin, a once-jailed smuggler who filed last month to sell 12 million shares of the Las Vegas-based company even as its market value holds 99.97 percent below the world’s biggest software-maker. “You have a feeding frenzy for the birth of a new industry.”
Robert Frichtel, his Advanced Cannabis Solutions Inc. up 144 percent after posting $455 in sales last quarter, said “euphoria” is driving gains that in some cases top 1,700 percent.
Shares of GreenGro Technologies Inc., which provides management services for medical dispensaries, has soared 1,714 percent to 80 cents. Tranzbyte Corp., which sells “pot” in Colorado, has gained more than 310 percent in five trading sessions, crossing above a penny for the first time in 11 months.
“It’s people freaking out, thinking they found the next home run and doing no research,” Frank Ingarra, head trader at Greenwich, Conn.-based North Coast Asset Management LLC, said by phone. “There might be one or two that survive, but having seen crazes like this, people have been burned by them a lot.The average investor should think twice.”
The Financial Industry Regulatory Authority issued an alert in August saying investors should beware of potentially fraudulent purveyors of stocks connected to marijuana and related services. Scammers may be promoting the shares, then selling them in what’s called a “pump-and dump” scheme, the brokerage watchdog organization said in a statement. It didn’t name any companies.
Investors should be particularly wary of executives who have been incarcerated, according to the Financial Industry Regulatory Authority’s the alert, which mentioned an unnamed CEO who spent nine years in prison for running one of the largest drug smuggling operations in history. Perlowin of Hemp Inc. said in an August interview that he thought the group meant him and that it’s “absurd” to criticize him for his experience dealing marijuana.
Hemp Inc. focuses on industrial hemp used in clothing and camping gear, Perlowin noted.
Brian Barish, president of Denver-based Cambiar Investors LLC, said: “I don’t really know that there’s a lot of stock-market money to be made in this. I’ve definitely seen some interest and gotten a couple calls. Most of them have been with chuckles on the other end of the line.”
Eighteen states and Washington, D.C., allow the medical use of marijuana, and 11 permit sales through dispensaries, according to the Denver-based National Conference of State Legislatures. National legalization has the potential to start a $35 billion to $45 billion a year industry, according to Bloomberg Industries.
“Pot” for recreational use sells for an average of $400 an ounce, compared with $200 an ounce that Colorado retailers collect for medical marijuana, according to Aaron Smith, executive director of the National Cannabis Industry Association, a Washington-based trade group.
Medbox Inc., which has a market value of $920 million, climbed to a one-year high of $73.90 on Tuesday. The West Hollywood, Calif.-based company had about $260,000 in profit on sales of $2.1 million in the third quarter of 2013, according to a Nov. 19 statement.
Advanced Cannabis, which leases space to producers and vendors, has climbed to $7.95 this year from $3.25. The Colorado Springs, Colo.-based company reported a $472,000 loss on the $455 in sales in the quarter ended Sept. 30.
“We kind of anticipated this happening with the euphoria that happens around the cannabis space with any significant news,” said Frichtel, president and chief executive officer of Advanced Cannabis. “Momentum is just starting to build behind the industry, and I assure we’ll do everything right to continue to promote shareholder value.”
Business, Pages 27 on 01/10/2014