MMJ Investors Forum

[JohnCM]

Seeking Alpha

12 Marijuana Stocks For Your Do Not 'Buy And Hold' List - Part III

Jan. 9, 2015 1:29 PM ET Includes: AMMJ, BLPG, CANL, CANV, FITX, GWPH, HEMP, MDBX, MJNA, NMUS, PMCB, THXBY

By Anthony Cataldo

I have selected a third set of 12 marijuana stocks to research.
All of these stocks might be profitable "day-trades," but my focus remains on the long-term and development of a buy-and-hold portfolio.
The data continues to support a focus on "event dates;" and we are at the beginning of “penny stock season.”.

Barring positive, firm-specific events, in the near-term, it is probably best not to buy and hold a portfolio of or any of these stocks past March or April 2015.
Generally, hold through March/April 2015, sell, buy in June-August 2015, sell in January-April 2016, and buy in June-August 2016 to position for the November 2016 elections.

Motivation

Knowing which stocks to buy (and generate gains), and when to buy, is important.
Knowing which stocks to avoid (and generate losses) is equally important.
This article is designed to assist you in (1) buying low and (2) selling high.
5 States are likely to put Recreational Marijuana Legalization on the 2016 Ballot

At this point in time, (1) California, (2) Nevada, (3) Massachusetts, (4) Maine and (5) Arizona are likely to put marijuana, for legal recreational use, on the November 2016 ballot. More could be added to this list. California is the "prize." Texas, Florida and New York are also relatively high population states, where Florida is a possible.

Combined, Alaska, Washington, Oregon, Colorado, and D.C. represent approximately 5% of the U.S. population. A favorable vote (November 2016) on recreational marijuana legalization in California, alone, a state representing more than 10% of the U.S. population, will triple the market for recreational use.

Of course, many are attracted to these marijuana stocks, as they anticipate, eventually, that 100% of the U.S. will legalize marijuana for recreational use. What other industry is likely to enjoy growth at 20 times the current market for their product?

Back-Testing Value-Weighted and Equal-Weighted Portfolios of Marijuana Stocks

My fist marijuana stock Seeking Alpha article listed N=47 stocks. That number has grown and is a bit of a moving target, which provided the motivation for this series, where I, cumulatively, examine n=12 stocks for each part of the series. (See Matthew Finston for some significant and insightful Seeking Alpha articles on marijuana stocks and this evolving sector or segment of the economy.)

Based on the above, previously published portfolio, below are both value-weighted (VW; at 1 share of stock) and equal-weighted (EW; at $500 invested per stock) portfolio charts. The VW portfolio excludes friction or commissions. Buying and selling commissions were presumed at $8 for each purchase and sale ($16 per round-trip) for the EW portfolio. The EW portfolio appears to have performed more favorably, at least when visually examining chart results (December 2, 2013 through November 28, 2014), as follows:

March 2014 was the Winning Event Date/Month and an Equal-Weighted Portfolio is the way to approach Marijuana Stock Investing

For both of the above, there were n=20 losers and n=27 winners (EW). Note that (1) the greatest returns occurred from early January purchases through March sales and (2) only a tiny bit of returns were generated, visible in the VW chart, for the November election and approval of recreational marijuana by Alaska, Oregon and the District of Columbia. These are relatively low population states and D.C.

For the EW portfolio, the $23,876 invested (i.e., $500+$8=$508x47), grew to $68,582 (a ~187% return), net of the sell commission. That is a very favorable 12 month return. The 52-week high occurred on March 18, 2014 at $559,617 (the line chart tends to "smooth" these measures).

For the VW portfolio, at 1 shares each, and without any commission or friction, the value of the portfolio grew from $90 to $118 (a ~31% return). Not as favorable as the EW portfolio, but still quite favorable for a 12 month period. The 52-week high occurred on March 5, 2014 at $323 (the line chart tends to "smooth" these measures).

Why the March 2014 Highs and Why January, February and March are Favorable?

For lack of a better characterization, January, February and March are "penny stock season." These months follow "tax loss selling" of "losers" in November and December of the prior calendar year, and, as selling pressures subside in January ("the January effect"), price per share recovers. When combined with the March 2014 events. From my earlier article:

…note that the vast majority of the 52-week highs for these 24 stocks occurred in March, 2014, the event date/period for the Canadian MMPR (Marihuana for Medical Purposes Regulations). That was the event date that drove so many of these 52-week highs.

You must keep in mind that Canada has a very small population, when compared to the U.S. This is, in part, why these marijuana stock prices did not "stick." The timing was perfect. March is considered, by many, to be the end of "penny stock season." Selling occurs in April and June, July and August are the times to buy penny stocks, to purchase at relatively low prices and for a long-term hold. This is anecdotal, but those experienced in penny stock trading can verify this general perception and fact.

Notes: The above bar chart was generated and based on data available after the market close on January 6, 2015. The bar chart was developed and is based on data contained in the below table. The below table format has been modified to capture more data than was presented in Part I and Part II of this series.

SEC Trading Suspensions

From the SEC website:

The SEC has seen an increase in the number of investor complaints regarding marijuana-related investments. The SEC recently issued temporary trading suspensions for the common stock of five different companies that claim their operations relate to the marijuana industry:

FusionPharm, Inc.
Cannabusiness Group, Inc.
GrowLife, Inc.
Advanced Cannabis Solutions, Inc.
Petrotech Oil and Gas, Inc.
The SEC suspended trading in these companies because of questions regarding the accuracy of publicly-available information about these companies' operations. For two of the companies, the trading suspensions were also based on potential illegal activity (unlawful sales of securities and market manipulation).

Again, and just as was the case of Part I and Part II, the stocks are listed in alphabetical order of the ticker symbol. The table is designed so that it captures a fair amount of data, and you can print it out and use it to formulate your own opinions on these stocks. The below table, also, contains the data from which the above graphic was developed:

1st
2nd
3rd
State
52-Week
12
12
12
Ticker
of Inc.
WC
High 2014
Notes
1
(OTCQB:ACOL)
FL
-
19-Mar
1
2
(OTCQB:AERO)
NV
-
10-Mar
3
(OTCQB:AGTK)
DE
-
6-Jan
1
(OTCQB:AMMJ)
DE
+
17-Oct
1
4
(OTCQX:ATTBF)
Canada
+
19-Mar
5
(OTCPK:BAYPD)
NV
-
1-Sep
2
2
(OTCQB:BLPG)
NV
-
1-Jul
1
1
(OTCQB:BRDT)
DE
+
19-Mar
3
(OTCQB:CANL)
NV
-
8-Jul
1
4
(OTCQB:CANV)
DE
+
21-Feb
2
(OTC:CBGI)
NV
-
18-Mar
3
(OTCPK:ERBB)
NV
-
24-Mar
5
(OTCPK:FITX)
NV
-
10-24 Feb
1
6
(OTCPK:FWDG)
DE
-
17-Jul
1
4
(OTCPK:GRCU)
CO
+
7-Apr
6
(NASDAQ:GWPH)
UK
+
1-Jul
7
(OTCPK:HEMP)
CO
+
5-Feb
5
(OTCPK:ICBU)
FL
-
24-Mar
7
(OTCQB:IMLFF)
Canada
-
21-Oct
1
6
(OTCPK:LGBI)
NV
-
25-Jul
1,2
7
(OTCQB:LXRP)
NV
+
19-Mar
2
8
(OTCQB:MBOO)
NV
-
Unknown
1,2
9
(OTCQB:MCIG)
NV
-
19-Mar
8
(OTCQB:MDBX)
NV
-
17-Jan
9
(OTCPK:MJNA)
OR
+
28-Jan
8
(OTCPK:NDEV)
NV
+
26-Aug
10
(OTCQB:NMUS)
NV
+
1-Dec
1
11
(NVLX)(OTCQB:PMCB)
NV
+
28-Feb
10
(OTCPK:PMCM)
DE
-
26-Mar
9
(OTCPK:REFG)
NV
+
14-Mar
2
11
(OTCQB:RSSFF)
Canada
+
10-Jun
1,2
10
(OTCPK:SING)
NV
-
10-Jan
11
(OTCPK:SPRWF)
Canada
+
22-Oct
1,2
12
(OTCPK:THCZ)
NV
-
12-Aug
1
12
(OTCQB:THXBY)
Israel
-
6-Jan-15
1
12
(OTCQB:UPOT)
NV
-
26-Mar
1,2
1 = not trading in March 2014, so excluded from above graphic.
2 = moved from mining to the marijuana sector.
Working capital (WC) measures ("+" for positive and "-" for negative) were developed on January 7. 2014, and are based on the measures and data available from Yahoo!Finance and Pink Sheets web sites. Only fifteen of the thirty-six (~42%) had positive working capital balances. If working capital is negative, and positive cash flows are not being generated from operations, potentially dilutive debt or equity issues are likely. This can be problematic when insiders with favorable stock price-per-share purchase prices can interfere with stock appreciation (e.g., these insiders, with superior or perfect information, dump their shares into any rally from positive news releases that they control).

Nineteen of the thirty-six firms (~53%) are incorporated in the state of Nevada, a state that has only ~8% of the market for corporate law, so Nevada has a disproportionately high percentage of publicly traded marijuana corporations. Only 6 of the thirty-six firms (~17%) are incorporated in the state of Delaware, a state that has ~54% of the market for corporate law, so Delaware has a disproportionately low percentage of publicly traded marijuana stocks.

Note that fifteen of the thirty-six (~42%) of these stocks did not trade as marijuana stocks during the March 2014 high. This is telling. The potential for upside over-reactions in marijuana stocks is attracting those firms that are not doing well in mining (8 of thirty-six or ~22%) or other industries or sectors to the "easy money," from stock sales, that are present and driven by the "recreational marijuana frenzy." Expect more firms to enter the marijuana sector or industry. Particularly, those from gold mining, silver mining, and energy/solar industries, where prices for all have declined, cooler heads prevail, and upside over-reactions in stock prices are less likely.

Additional information is provided below for this third group of 12 marijuana stocks. All charts were prepared before the market open on January 8, 2015:

American Cannabis Company, Inc. (OTCQB:AMMJ) is a Delaware corporation with positive working capital. Their accounting firm has 5 warning signs out of twelve clients. This is not favorable, as we are known by the company we keep. The partner is also the CFO of a firm (see LinkedIn). This is atypical, but it is possible that her LinkedIn website is not up-to-date. The income statement is favorable, but read the "convertible notes" section of the financials:
…convertible..,into shares of the Company's common stock at $0.08 per share…

The stock is trading at about $0.70 per share, and someone has the right to buy at $0.08 per share. I want the same deal they got. I would not buy and hold this stock, and, would go so far as to suggest that the stock should be trading at $0.08 per share, now.

2. Blue Line Protection Group, Inc. (OTCQB:BLPG) is a Nevada corporation. Financials are unfavorable, and, again, related party debt is present. I do not like this. It provides a vehicle to assure favorable, insider treatment and dilution. Even if good news hits the press, insiders have the first opportunity to "feed at the trough" and there is really no reason for them to allow the stock price to rise for common shareholders. I see no compelling reason to buy and hold this stock.

3. CanLabs, Inc. (OTCQB:CANL) is a Nevada corporation with negative working capital, related party debt and preferred shares with a conversion feature that favors insiders. Again, this capital structure is designed to make sure that insiders reap all of the benefits of any stock price appreciation and it is just too likely that they will sell shares into any rally that they control:

Upon the closing of the Merger, the Company, pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement") issued to an accredited investor 500,000 shares of the Company's 8% Series A Convertible Preferred Stock (the "Series A Preferred Shares") at an original issue price of $1.00 per share (the "Original Issue Price") and warrants to purchase 20,000,000 shares of the Company's common stock (the "Warrants") for an aggregate purchase price of $500,000."

If you do the math, the warrants on the common stock suggests that it is really only worth about $0.025 per share ($500,000 divided by 20,000,000), but it is trading at more than $0.20 per share. Again, I want the same deal they got. I would not buy and hold this stock.

4. CannaVest Corp. (OTCQB:CANV) is a Delaware corporation with positive working capital. This one has a very ugly 1 year chart, but has a great working capital position from stock sales. The below is from the financials:

On March 1, 2013, the Company issued a Promissory Note (the "Note") to Roen Ventures, LLC, a Nevada limited liability company ("Roen Ventures"), in exchange for loans provided and to be provided in the future in an amount of up to $2,000,000, subsequently increased to $6,000,000. As of December 31, 2013, the principal balance of the Note was $6,092,069. On January 27, 2014, the Company converted $6,000,000 of the Note balance into 10,000,000 shares of common stock of the Company pursuant to the terms of the Note, as amended. On January 28, 2014, the Company repaid Roen Ventures accrued interest on the Note in the amount of $187,453 and principal under the Note in the amount of $92,069.

Am I doing the math correctly? Someone loaned me $6 million and I gave them stock worth $29 million (10 million shares x $2.90 per share)? I would not buy and hold this stock unless I am offered a comparable deal.

5. Creative Edge Nutrition, Inc. (OTCPK:FITX) is a Nevada corporation with a negative working capital position, and has been in the news, lately. Again, look for these related party transactions to determine the actual value of the stock. From the financials:

Two consultants have loaned the Company $541,350 on unsecured demand notes payable. The notes have a conversion right of a maximum of 60% to the closing bid price with certain limits based on the reporting status of the Company. The loans carry an 8% interest rate. At June 30, 2014, the Company has accrued $20,822 in interest.

I would not buy and hold this stock, unless they offered me the stock at 60% of the bid. I, also, want 8% interest, since I cannot find this favorable rate of return from credit worthy firms and in the broader market.

6. GW Pharmaceuticals PLC-ADR (GWPH) is a United Kingdom corporation with a positive working capital position. This is a real firm, with real earnings, but not a marijuana "pure play." Note, in the below chart, that the stock price spiked a bit in March 2014.

Take your time for a favorable entry price, but this one looks good for a long-term buy and hold. It would appear that the stocks that are not marijuana "pure plays" are benefitting from marijuana-based events, without the terrible decline in price per share that follows the "pump" or upside over-reaction from these event dates.

Of course, the stock is less likely to go up 1,000% in a very few days, as these stocks trade more efficiently, so you are limiting risk, but also limiting upside on an, otherwise, "lottery ticket-type" marijuana penny stock that you might profitably day-trade.

7. Hemp, Inc. (OTCPK:HEMP) is a Colorado corporation with a positive working capital position. It is rare that I see a firm with more than 2 billion shares issued and outstanding. Cool name and ticker symbol, but I would not recommend this firm as a long term buy and hold.

8. Medbox, Inc. (OTCQB:MDBX) is a Nevada corporation with negative working capital position, convertibles and related party notes, from which positive cash flows are being generated. Conversion features for the debt are too complex to produce in this article, but you should review them before considering a buy and hold for this stock. The terms do not favor non-insider or common shareholders. At this point in time, I would not recommend buying and holding this stock.

9. Medical Marijuana, Inc. (OTCPK:MJNA) is an Oregon corporation with a positive working capital position. Five of the 9 firms disclosed as clients of their legal counsel have warning signs on the Pink Sheets web site. Fundamentals in their financials suggest that this one might be worth a nibble, but, again, as we are known by the company we keep, these warning signs concern me. I would not jump in with both feet or buy and hold this one at this point in time.

10. Nemus Bioscience, Inc. (OTCQB:NMUS) is a Nevada corporation with a positive working capital position. This firm does not have any revenues and is generating positive cash flow from private placement sales of stock and warrants. From the firm's website:

December 4, 2014
Nemus To Move Forward With Cannabinoid-Based Therapy For Open-Angle Glaucoma
November 26, 2014
Nemus Bioscience Is Now Quoted On The OTC Bulletin Board Under The Ticker Symble (sic) of "NMUS"
November 4, 2014
NEMUS Completes Reverse Merger With Load Guard Logistics, Inc.
NEMUS Bioscience and the University of Mississippi entered into a research and in-licensing collaboration agreement this year.

I would put this one on my watch list and consider for a favorable entry price with a possible long-term buy-and-hold. This firm is engaged in glaucoma research, a legitimate, medical application for marijuana.

11. Nuvilex, Inc. (NVLX) and (OTCQB:PMCB) is a Nevada Corporation. They have a very significant and positive working capital position, but no revenues. There are no positive cash flows, in any of the 3 classifications of their statement of cash flows, in the most recent quarter (October 2014). This stock could be a "sleeper," but there are so many shares of stock and warrants flying out the door, that, even if successful, there might be nothing left for non-insider common equity stakeholders.

Three of 7 of the publicly traded firms for their accountant have "stop" signs. Their legal counsel is a bit better. Their Cell-in-a-Box® technology may, in fact, assist those with pancreatic cancer. So, I hesitate to be too critical, but the stock is trading down, at about $0.20 per share. This firm could be legitimate, but their use of marijuana in headlines concerns me, as it suggests some desire to raise capital from the "marijuana frenzy."

With a market cap of $138 million, I hope they do well and save lives, but it troubles me that a cancer cure is combined with a cannabis headline that, also, tends to spike the stock price (October 29, 2014), and, coincidentally, this news is released immediately before the November elections for marijuana decriminalization in OR, AK and D.C. I might be jaded, but I would probably "wait and see" on this one. I am not recommending this stock for a long-term buy-and-hold.

12. Therapix Biosciences Ltd. (OTCQB:THXBY) is an Israel corporation with a negative working capital position. An Ernst & Young member accounting firm as their accountant is a positive, even though unaudited financials were provided. The stock has a bid/ask spread of $0.19/$2.16, and does not really trade with any volume to speak of. A recent transaction provides some evidence of perceived market value by insiders:

On November 19, 2014, the Company entered into a private placement agreement where 1,300,000 Ordinary shares, 1,300,000 fully vested warrants and 1,300,000 conditional warrants were offered. The total Net proceeds from the offered securities were NIS 650 thousand. As of November 27, 2014, an amount of NIS 300 thousand was received.

One Israeli New Sheqel (NIS) equals $0.26 US dollar, so $169,000 suggests a market value of about $0.13 per share (i.e., $169,000 divided by 1.3 million), excluding the warrants, so well below the bid of about $0.19 per share, unadjusted for the below:

TEL AVIV, Israel, Oct. 7, 2014 (GLOBE NEWSWIRE) -- Therapix Bio (TASE:TRPX) (OTCQB:THXBY) today announced that its American Depository Receipts (ADRs) have been registered and approved for trading on OTCQB®. The ADRs, each representing 20 ordinary shares, began trading on October 6, 2014 under the symbol THXBY.

I would put this one on my watch list, but would not pull the trigger as a long-term buy-and-hold quite yet. I want more information and would like to see how the stock trades and reacts to news, and also view future news releases of news as it relates to dilution.

Summary of Significant and Actionable Findings

I recommend an equal-weighted portfolio of marijuana stocks, probably, at a minimum of $500 per stock, for your long-term buy-and-hold portfolio.
I do not recommend a long-term buy and hold on any marijuana stock "pure plays," at this point in time. There is no immediate event, like that in March 2014, to warrant the risk. Keep economic resources "parked" in a more stable security or cash, in the interim.
There is too much risk of buying and holding a marijuana stock likely to attract an SEC trading suspension, at this point in time, so, to reduce risk, day-trade or find some alternative methodology to reduce your "holding" period for these stocks.

For 2014, the January through March period resulted in a significant increase in marijuana stocks. Note that the November election-based increases in marijuana stocks were very modest, by comparison (see the first 2 line charts of value-weighted and equal-weighted marijuana portfolios).

The November 2014 ballots and elections, adding Alaska, Oregon and D.C. to Washington and Colorado, legalizing recreational marijuana, were not as important as the January through March 2014 period for the 2014 calendar year. These states have tiny populations and did not significantly increase the market for recreational marijuana (again, see the first 2 line charts of value-weighted and equal-weighted marijuana portfolios).

The next big event date that I am aware of is the November 2016 elections. California, alone, more than triples the market for recreational marijuana. This should be your long-term focus. Keep your eye on the ball and this very significant event date.

Expect more marijuana industry entrants, particularly from the gold mining, silver mining and energy sectors, where they have failed in one industry, but will attempt to convince you that they can succeed in growing and generating shareholder value in or as a firm supporting the marijuana industry.

Beware of complex capital structures, for penny stocks, with convertible debt, warrants, preferred stock, and comparable agreements that are likely to benefit insiders and provide strong economic incentives, for them, but not for you.

Beware of "true believers" touting these thinly capitalized marijuana stocks. If they use an alias, ask them to provide their true identity. If they are unwilling to do this, they are "sniping from cover," and you must decide if this is reasonable.

Finally, I am not yet ready to "pull the trigger" on these stocks for a long-term hold, and I recommend, at this point in time, that you view them as a "trade" and not as a "buy and hold." Please notify me of any new marijuana tickers to examine in and for Part IV of this series.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.