It can be difficult to identify the best pot penny stocks at the moment.
Several U.S. Securities and Exchange Commission trading halts last year on pot penny stocks show that there's no shortage of scammers looking to seize on a political climate more receptive to marijuana legalization.
But all the scams and pump-and-dumps schemes aren't representative of the industry as a whole --and don't illustrate where cannabis is headed.
"Those were not issues regarding cannabis," Leslie Bocskor, managing partner at Electrum Partners, told Money Morning. "Those were issues regarding publicly traded companies and the actions being taken by insiders in those companies, and other people taking advantage of the interest in trading this market to use it as a way to get liquidity at pricing that might not be reasonable."
Bocskor said we see this with companies like Advanced Cannabis Solutions Inc., also known as General Cannabis Corp. (OTCMKTS: CANN).
"They have no real business of any substance and they have a very high valuation," Bocskor said. "The reason that they trade at these very high valuations is that the people that are involved in reverse mergers and the promotions have free trading stock and they want to see them trade at a high valuation and get a lot of interest so they can get out."
Investors are right to be wary of treading in pot penny stock territory. But there are ways to identify the best pot penny stocks, even if you want to wait it out as an observer and not an investor at the moment.
The Best Pot Penny Stocks and How to Find Them
Steve Gormley, chief business development officer at OSL Holdings Inc. (OTCMKTS: OSLH) - a company whose stock can be considered a pot penny stock - said there's a simple rule for finding the best pot penny stocks.
"The same fundamentals that exist among blue chips should be applied criteria when making investment decisions in the cannabis vertical," Gormley told Money Morning. "I wouldn't invest in something that was pre-revenue. I wouldn't invest in something that was a murky service that didn't have contracts. I wouldn't invest if it didn't have hard assets attached to it. And that would be the criteria that I would recommend for anyone coming into the space."
And operating within the law - and at the discretion of the SEC - is a must as well. He said that rather than being concerned by the SEC trading halts last year, his company welcomed them as a way to weed out the bad actors in the space.
"They were poking the SEC and federal government in the eye, they were riding the wave of putting the word 'marijuana' or 'cannabis' in a press release and seeing hockey stick trajectory as a function of that," Gormley said. "But the reality is that those companies also didn't have real products or services or revenue-generating assets. Most of those companies, if you take a closer look, were all pre-revenue."
Gormley said OSL Holdings is going to be the "tortoise" in the race.
His company works to acquire, invest in, and manage businesses that serve marijuana retailers and cultivators. It will operate within the letter of the federal law and is not simply seizing on the fervor that propelled a lot of pot penny stocks to ridiculous valuations last year.
Gormley and other entrepreneurs in the space reveal an important reality about the cannabis industry and the best pot penny stocks to buy right now.
That is, the best pot penny stocks are those of companies not looking to leapfrog every other company by tiptoeing around the edges of federal legality. They are slowly working to acquire assets, build brand name, and prepare for what could very well be a big industry as the law allows it.
They are less worried about pumping the stock up and more concerned with ensuring that they can drive value in the space.
Cannabis promises to be a huge industry should full-on federal legalization take place. There are a number of subsectors that Electrum Partners' Brocskor said include "recreational, medical, supplement and nutraceutical-based cannabis products, pharmaceutical-based cannabis developments, industrial hemp, veterinary-based products, and ancillary subsectors."
"The way we look at this is not the creation of a new industry. This is the migration of a black market industry into a regulated industry," Brocskor said. "The opportunities we see are massive and they span all of those different subsectors. The overarching opportunity could easily be in the hundreds of billions of dollars on a yearly basis."
One company in particular that looks to be putting together the pieces of a viable pot penny stock is Evergreen Systems Inc., a subsidiary of Mediatechnics Corp. (OTCMKTS: MEDT).
Jeremy Carr, who's looking to unveil BlazeNow, an iOS and web-based app to also be offered on Android, will provide listings for dispensaries as well as point-of-sale and inventory management services. BlazeNow represents a tech niche within the cannabis sector -- an indication that there's more to pot stocks than just cultivation and distribution.
And what's encouraging about Carr's venture is that he is focused on growing the business and breaking into the space, not pumping up the stock price.
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"It is traded," Carr told Money Morning. "I've just been more focused on getting the product finished. I'm not trying to heavily promote the stock, I want to concentrate on building the business and get it out there and let people see for themselves."
But even the best pot penny stocks are still penny stocks.
They carry a lot of risk, especially in a market that has its share of dubious names drawing SEC scrutiny.
The best cannabis companies right now are more worried about finding their place in the industry, not growing their stock.
And investors should view the industry accordingly.
Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.
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