Marijuana Penny Stocks Are High
"Penny stock investors all made exponential returns on their money within a few days, and then short sellers like me cleaned up when their unsustainable run-ups crashed 40% to 70% within a few days," said Sykes, a Miami-based entrepreneur, stock trader and penny stock expert.
Marijuana-related companies , such as GrowLife (PHOT), Cannabis Science (CBIS) and Medical Marijuana (MJNA), are traded on the Over The Counter Bulletin Board (OTCBB).
"Experience teaches me there will be more waves based on breaking sector news in the coming weeks and months," Sykes told MainStreet.
Marijuana stocks are rapidly catching the attention of Wall Street as restrictions loosen for the cannabis industry nationwide.
"There are a number of stocks out there but at this stage the valuation of those companies can be driven more by investor excitement than by actual value added, which is why you see wild fluctuations when the marijuana industry is heavily featured in the news ," said Justin Hartfield, Orange County-based CEO of the Emerald Ocean Capital private equity firm.
Because the sector has experienced so much media hype, penny stocks have doubled and even quadrupled since January 1 when Colorado legalized the sale of cannabis.
For example, Advanced Cannabis Solutions (CANN) started the year at $3.25 a share and is now trading at $15.85 a share.
"That's a 388% increase in two weeks," Sykes said. "Applying simple technical analysis to buying a marijuana penny stock involves finding those that are breaking out above previous highs to dramatically increase the odds of profits for investors."
But along with fat rewards comes risk.
"Nowhere else in the stock market can you find such returns as with penny stocks," said Sykes who wrote the book An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund (BullShip Press, 2007). "Investors just have to be sure to lock in profits along the way during the run-ups and not fall in love with any of these stocks for too long."
Penny stocks however are not subject to the same reporting requirements as companies listed on the New York Stock Exchange or the NASDAQ.
"More and more investors are taking an interest in ancillary marijuana businesses as the country marches toward legalization. Like any burgeoning industry, early investors willing to take risks will see payoff much greater than later adopters," Hartfield told MainStreet.
Tips for Short Selling Cannabis Stocks
- 1. Marijuana stocks don't rise on fundamentals because the industry is too new for revenues and profits. "Valuation is based on hype and potential," Sykes said. "The bigger the marijuana-related idea, the bigger the stock spike potential no matter if the company can actually pull it off. It's the Wild West right now."
- 2. Lock in profits by purchasing stocks with specific targets and exit prices. "Once you hit those targets and prices or anything close, take the profits and run," Sykes said. "Much of it isn't predictable. I myself aim for 20% to 30% gains per position in one or two days given the volatility."
- 3. Vanishing trading volume is an indication of media frenzy wearing off. "Ride the hype but be sure to exit when the momentum even begins to look like it might fade," said Sykes.
--Written by Juliette Fairley for MainStreet