Marijuana Stocks: The Bubble Is Bursting

Marijuana stocks have dominated financial news sites in 2014. But those who see marijuana stocks as the next big business opportunity should know that the dream is mostly smoke and blacklight posters.

Sure, recent polls dramatically favor legalizing marijuana for recreational use across the U.S. And sure, many other states including Maryland are moving to decriminalize pot and taking slow steps toward broad legalization.

But just because marijuana stocks and the business of getting high are moving into the mainstream, that doesn’t mean that these businesses are good investments. 

Here’s why marijuana stocks are fraught with more problems than most investors realize:

Financing and business support are issues: Reports indicate that despite a more favorable legal environment for medical marijuana stocks, pot parlors and other related businesses, banks are reluctant to provide financing and support. Furthermore, many communities have formal restrictions limiting how marijuana companies operate — and even if they don’t, the stigma associated with the business in the eyes of some mean a cold shoulder when pot-related businesses need support or services.

Profits can be tight, taxes large: As the old saying goes, money doesn’t grow on trees. And while it’s tempting to think marijuana stocks are selling their products at massive margins, that’s not often the case. Furthermore, tax burdens are intense; many marijuana stocks are excluded from broader business tax breaks, and most pot legalization legislation demands a high tax burden on these businesses in exchange for allowing them to operate.

Few legit marijuana stocks exist: Most disturbingly for investors, most marijuana stocks out there are highly volatile microcaps that trade on thin volume and with little analyst coverage. When marijuana stocks are trading for pennies per share, they are open to manipulation and pump-and-dump schemes. I have long warned investors about the risk of penny stocks and microcaps, but don’t take my word for it … take this note from FINRA last year that cautioned that, “The con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success.”

Think all my criticism of marijuana stocks is unwarranted? Well consider, then, these recent returns for some of the more popular marijuana stocks in the space:

• Hemp (HEMP): Down more than 75% from its February peak.


• Cannabis Science (CBIS): Down more than 60% from its February peak


• Medical Marijuana (MJNA): Down more than 50% from its January peak


• Tranzbyte Corporation (ERBB): Down more than 70% from its March peak

Even if the bubble is not bursting, the big risk in this sector is evident. If you are not prepared for this kind of volatility, then you’re not prepared to invest in marijuana stocks.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. 

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Marijuana Stocks: The Bubble Is Bursting