GrowLife Stock Illustrates Hazards of Pot Penny Stocks

GrowLife stock (OTCMKTS: PHOT) is a perfect case study in the perilous world of pot penny stock investing.

GrowLife stockRiding the sudden wave of excitement surrounding a growing push to decriminalize marijuana in several states, investors began piling into pot stocks with reckless abandon. They were hoping to get in on the ground floor of a soon-to-be burgeoning marijuana industry.

A lot of stock buying was done without much due diligence on the part of these investors. That allowed for a number of dubious over-the-counter names to see big gains - sometimes overnight - in a buying frenzy fueled by little else than misplaced optimism.

Perhaps the biggest surge came in March 2014. This was when Washington State began issuing licenses for legal marijuana vendors. The gains were eye-watering for some companies.

Cannabusiness Group Inc. (OTCMKTS: CBGI) soared as much as 1,600% on the month. PHOT stock only gained 111.8%.

But it was short-lived. Almost all of the pot penny stocks that spiked in March crashed shortly thereafter. And starting in spring, the Securities and Exchange Commission was getting suspicious. By summer, it had suspended trading for eight marijuana stocks, GrowLife stock included.

The SEC charged that these companies exploited "the latest innovation, technology, product, or growth industry - in this case, marijuana - to lure investors with the promise of high returns."

You see, these companies trade on over-the-counter exchanges. They aren't subject to the same level of federal oversight in disseminating publicly available information as companies trading on the traditional exchanges are.

And that leaves investors in the dark as to whether these companies really are capitalizing on a soon-to-be explosive growth industry, or simply serving as a pump-and-dump operation for greedy insiders to cash out of once they've attracted enough gullible investors.

That's not to say investing in marijuana stocks is a hopeless pursuit...

In October 2014, The Washington Post reported that by 2020 the marijuana business could be bigger than the NFL. This was all based on a report by Greenwave Advisors that estimated the industry could rake in revenue of $35 billion by that time.

But, this industry is in its infancy and still ripe for fraudsters.

These marijuana penny stocks are likely to be bereft of big winners - if there even are any.

And GrowLife stock provides a good glimpse into the hazards of trying to pick one...

What GrowLife Stock Says About Pot Stocks Right Now

GrowLife stock traded as high as $0.777 by mid-March 2014 on the pot investing craze. But those gains were forfeited on April 10 as soon as the SEC stepped in.

When trading in GrowLife stock resumed on April 25, it collapsed 58%. It closed the day at $0.21. It has not traded back above that level since and has fallen another 89.5%, closing yesterday (Monday) at $0.022.

Whatever excitement GrowLife stock investors may have had has subsided. Many insiders, including the wife of former CEO Sterling Scott, cashed out just before trading was suspended. It became the target of shareholder litigation alleging that the company misled investors.

GrowLife's new CEO Marco Hegyi pledges that the company is looking for a market-maker to bring the company out of the "gray" OTC market. He said in a July 2014 article by The Seattle Times that the company is turning a new leaf.

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He made clear that his company is not selling drug paraphernalia or trying to cash in on the political climate. GrowLife is primarily a gardening and hydroponics company that targets legal growers of the drug, Hegyi has said.

But for all the hopeful rhetoric surrounding GrowLife stock, investors are wary of getting burned by marijuana stocks vulnerable to dramatic price swings and federal scrutiny.

And you should be, too.

If you're looking to jump in on pot stock investing, the best place to go is an established name with experience in the industry, not embattled microcap stocks like PHOT.

Money Morning Defense and Tech Specialist Michael Robinson recommends GW Pharmaceuticals Plc. (Nasdaq ADR: GWPH) - "the global leader in the development of plant-based cannabinoid therapeutics."

"With its solid science, multiple uses for its main cannabis-based biotech product, and strong alliances with global drug leaders, GW Pharmaceuticals should leave investors richly rewarded," Robinson said.

Bottom Line: Is GrowLife stock going legit? It's too early to tell. For now, as GrowLife attempts to settle civil lawsuits, stay away. Also, take the SEC's advice on this one and keep your distance from pot penny stocks, lest you end up holding the bag for potential fraudsters seizing on the shifting political environment to orchestrate a quick pump-and-dump. Marijuana stocks may well end up being a good investment. And what's more, you don't have to miss out. But stick to a more established investment like GWPH stock and leave the penny stocks to the speculators.

Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.

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