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The marijuana sector combines the triple-digit profit potential of penny stocks with the exciting growth of the emerging marijuana market. But it can also be risky, which is why we're going to show you one recent marijuana penny stock scandal - and how you can avoid similar ones in the future.
These tiny pot stocks can offer investors triple-digit returns in just a matter of weeks. For example, Novo Integrated Sciences Inc. (OTCMKTS: NVOS) soared from $0.28 on Aug. 31 to $0.85 on Sept. 20. That's a massive 203.6% gain in less than three weeks.
But marijuana penny stocks can be risky, since most trade on pink sheets or over-the-counter (OTC) exchanges. Unlike stocks on the New York Stock Exchange (NYSE) or Nasdaq, penny stocks listed on these OTC exchanges don't require stringent SEC filings.
And one particular marijuana penny stock is currently being investigated by the SEC for essentially lying to its investors. If the company is found guilty, investors could lose all of their principal investment...
Investors Who Own This Marijuana Penny Stock Could Lose Their Money
In June, CV Sciences Inc. (OTCMKTS: CVSI), also known as CannaVest, was charged with fraud by the SEC. The charge ties into the company's CEO, Michael Mona, Jr., intentionally reporting false information in one of the company's 2013 filings.
Back in 2013, CannaVest was one of the best-performing cannabis stocks on the market. It rocketed 700% that year, from $5 per share to $40. CVSI stock eventually peaked at a record high of $69.90 per share in January 2014.
But CVSI has since lost nearly all of its value. Shares have suspiciously crashed 99.6% from the January 2014 high to $0.31 today (Friday, Sept. 22).
And it was discovered in June that Mona reported the value of the company's assets was higher than it actually is...
The fraud stems from the hemp-based biotech PhytoSPHERE Systems, which CV Sciences acquired for a reported $35 million. But while $35 million was what Mona reported to the SEC in the first half of 2013, he allegedly knew the acquisition price tag was far lower than that.
In fact, CannaVest said in its Q3 2013 filing that it acquired PhytoSPHERE for a mere $8 million. That was 77.1% lower than the $35 million initially reported. Once the SEC caught wind of this discrepancy, the agency found that Mona didn't acknowledge how the $35 million price tag was overstated in the first two quarters of 2013.
Now the SEC says this false recording was intentional and therefore grounds for fraud. Although the agency hasn't suspended trading on CannaVest yet, it likely will if Mona and the company are found guilty.
Special Report: Cannabis Is the Gold Rush of the 21st Century - 30 Stocks to Invest in Now. Details here...
Investors have clearly already lost all confidence in the business, and any more negative news could ruin the company. Corporate scandals are usually deadly for a company's stock price. Shares of Valeant Pharmaceuticals International Inc. (NYSE: VRX), for instance, have crashed 94.6%, from $257.53 in July 2015 to $13.98 today, following allegations of accounting fraud and drug price gouging.
Scandals can be even more deadly for penny stocks since they're so inexpensive. With shares of CVSI already trading at the low $0.31 level, a surge in selling behavior could send the stock price to $0. That would force CannaVest to file for bankruptcy and, even more importantly, cause any remaining shareholders to lose their money.
While marijuana penny stock frauds like CannaVest can entice you to avoid the cannabis industry altogether, investors who do so risk missing out on profits. There are simple ways to find out if a pot stock is safe enough for your money.
Here at Money Morning, we want to make sure you know how to safely invest in the marijuana sector. Today, we're going to show you these two easy ways to identify safe pot stocks to buy...
Follow These 2 Tips for Safe Marijuana Investing
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Our first marijuana investing tip is to beware of companies that frequently change their name.
According to the Financial Industry Regulatory Authority (FINRA), these companies are usually involved with fraud or manipulation.
And CannaVest, or CV Sciences, is perfect evidence of FINRA's claim. The firm was originally named CannaVest during the stock's peak performance in 2013. However, the name was eventually changed to CV Sciences after shares of the stock began to plummet in 2015 and 2016.
Although FINRA doesn't disclose the names of companies that do this, it provided one anonymous example that changed its name four times in the last decade. Oftentimes, these firms change their names to alter their image when their stocks perform poorly.
To seek out these name changes, FINRA advises digging through press releases and quarterly reports. These can be found in the SEC's EDGAR extensive filing database.
The second tip is to understand the risks of over-the-counter (OTC) exchanges...
Because marijuana is still illegal under federal rules, it's considered a fringe market, meaning most of these companies don't meet the requirements needed to list on the Nasdaq or the New York Stock Exchange (NYSE). That's why most of them trade on OTC exchanges.
FINRA states that there are hardly any minimum requirements for being listed on OTC exchanges. This is a major reason why the majority of penny stocks trading for mere cents are listed on them.
However, marijuana penny stocks trading over the counter can be volatile. That's because their trading volume is lower than traditional stocks, meaning an investor may be tempted to quickly buy or sell a stock if he or she sees a spike in volume.
Since they're so volatile, investors should only buy these OTC marijuana penny stocks if they can afford some risk. According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, penny stocks in general should never make up more than 2% of your portfolio.
The Best Pot Stocks: After months of research, we've found the most lucrative and fastest-growing legal pot stocks in America. And for a limited time, you can get all the details for free. Learn more...