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Read This Before You Buy a Marijuana Stock

By Frank Curzio, editor, Small Stock Specialist
Friday, August 8, 2014

Sentiment toward the sector is improving, with nearly 60% of Americans believing marijuana should be fully legalized. As a result of the shift in views, Colorado and Washington recently approved marijuana for recreational use. And 23 states and the District of Columbia have legalized medical cannabis. With the tax revenue these states can generate from marijuana, it's likely the rest will follow.
And with more states legalizing marijuana, it's estimated the industry could grow from less than $2 billion today... to more than $10 billion in 2018 – a 500% increase over the next four years. But some forecasts estimate the marijuana industry could soon be worth more than $100 billion.
This creates a huge opportunity for early investors to get into the next multibillion-dollar industry at an early stage. But if you invest in the wrong companies, you could lose a lot of money...
When a trend is in its early-growth phase... everyone wants in.
Just having a small position in a growth trend like cloud computing, big data, or 3-D printing could double or even triple the market value of a company.
For example, in the late 1990s, the dot-com craze went into hyper-speed. Tech companies with no business model and a few web pages traded for more than $100 a share. Company market caps went from $50 million to more than $1 billion in a few weeks just by adding ".com" to their names.
Many dot-com companies no longer exist. However, the few with strong business models, like Amazon and Priceline, are now industry heavyweights.
We are seeing a similar trend in marijuana stocks today. Companies are changing their names to include words like "hemp" and "cannabis" as states legalize marijuana.
Some companies in the marijuana industry will become the next Amazon and Priceline. But most of these companies won't survive. They generate no revenue, and have inexperienced management teams and poor business plans. Even worse, several of these marijuana companies have questionable financials.
Take Medbox (MDBX), for example. Medbox makes medicine-dispensing systems (almost like a vending machine) designed to keep medicine – including marijuana – secure and sanitary for consumption.
Shares traded for around $25 a share one year ago. But after several states began pushing through legislation to legalize marijuana, investors poured into the stock – pushing shares to more than $70 in the blink of an eye.
Since then, several negative reports have surfaced about the company's sketchy management team and questionable financials.
For example, according to Medbox's third-quarter report, it earned $0.01 per share in profits. Yet, another set of financials (using CapitalIQ) show a third-quarter loss of $0.01 per share. There are several discrepancies between what the company is saying (press releases) and what it reported in its May 2013 filing.
Medbox does a great job of hiding this information. It only provides financial statements on its website that date back a few months. Every public company I've ever researched has an archive of past financial statements listed on its website. Not Medbox.
On top of that, the company's long-term business model is flawed.
Medbox is trying to put its medicinal-purpose dispensing machines in hospitals around the country. But many of the states that have already approved marijuana for medicinal purposes will eventually approve it for recreational use as well.
That raises the question...
Why buy marijuana from a machine instead of going directly to a store to sample, smell, and feel it?
I don't see medicinal-marijuana users lining up to buy pot from a machine in a hospital. It just wouldn't be the same quality.
Plus, many people who use pot as a pain suppressant will probably look to have marijuana delivered to their doorstep – since it's too painful to travel to an urgent care center or hospital. In short, I don't see the need for a machine that dispenses marijuana.
Apparently, investors don't anymore, either. After news about its questionable financials broke, the stock fell from more than $70 per share in January to around $13 today. Anyone who invested at the top would be down more than 81% today.
That's why it's so important to make sure you look under the hood before buying a marijuana stock. Medbox isn't the only company out there with a flawed business plan, bad management team, and questionable financials. Many of the popular marijuana companies that get mentioned in the media are just as bad as Medbox. These are dangerous stocks that are giving the industry a bad name. And they're losing investors a lot of money.
If you're thinking of investing in the marijuana industry, I urge you to do your due diligence. Make sure the company files with the Security & Exchange Commission (SEC). The company's quarterly and annual reports should be easy to find on its website. And make sure its management is credible. Also, don't invest in companies that have recently changed their name just to profit from the marijuana trend.
This is the starting point to find solid, legit companies that will benefit from the marijuana megatrend.
Good investing,
Frank Curzio

Further Reading:

If you're looking for growth, Frank says Brazil is one of the fastest-growing markets in the world right now – despite what the media is saying. "The fears and negative stories written about Brazil are overblown," he writes. As investors realize this, Frank expects Brazilian stocks to soar. Get all the details here.
Dr. David 'Doc' Eifrig recently urged American investors to add international stocks to their portfolios. If you do, he says, "you can avoid 'overleveraging' your exposure to the U.S. economy... and also pick up some investment bargains." See which countries Doc says are bargains today here.

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