Pot stocks have delivered triple- and even quadruple-digit returns to investors in 2017. For example, Amfil Technologies Inc. (OTCMKTS: AMFE) has exploded a massive 1,942.8% so far this year.
5 Things Marijuana Investors Need to Know Now
But there's still risk involved in this industry, as you'll see when we detail this recent marijuana penny stock scandal. Afterward, we'll also give you two important tips for avoiding these kinds of scams in the future...
This Marijuana Penny Stock Is Being Investigated by the SEC
The investigation involves one of 2013's top-performing marijuana stocks: CV Sciences Inc. (OTCMKTS: CVSI), which also goes by the name CannaVest. It's a Las Vegas-based cannabis firm charged with fraud back in June for falsifying its finances in 2013.
That year - 2013 - was considered a banner year for CVSI stock, which rocketed 700%, from $5 to $40. By January 2014, it had reached an all-time high of $70.
But CannaVest's 700% return in 2013 has since been overshadowed by its crash in value. As of Nov. 10, the stock has plunged 99.7%, to $0.24, from that January 2014 peak.
Shares have also declined another 20% since June 16 - the date the SEC alleged CannaVest CEO Michael Mona, Jr., overstated one of the firm's acquisitions in 2013. This led CVSI investors to believe Mona and the company had more cash reserved for acquisitions than it actually did.
In the first half of 2013, the company reported to the SEC that it bought hemp oil producer PhytoSPHERE Systems for $35 million. But in the third quarter of 2013, CV Sciences reported a much lower acquisition value of $8 million. The SEC noticed this big price difference and said it was grounds for fraud, formally filing charges against the firm on June 16.
Pot Profits: Forget Jeff Sessions! These Five Canadian Pot Stocks Are Set to Skyrocket. Click Here...
If CannaVest is found guilty of manipulating its acquisition price, the SEC could suspend trading on its stock. And if that happens, it's possible that CVSI investors could endure more than just the 11% loss their shares have already seen since June 16. They could end up losing all of their initial investment due to the firm's possibly intentional recording error.
Although these kinds of marijuana stock scandals can convince you to stay away from the marijuana sector, investors who avoid it can miss out on profits. That's why we want to show you how to easily determine if a cannabis stock is a safe investment.
Here are two important ways to find safe marijuana stocks to buy...
2 Ways You Can Avoid a Marijuana Penny Stock Scam
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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 firms 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 and 2014. 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 filing database online.
The second tip is to recognize the risks of over-the-counter (OTC) exchanges.
Because marijuana is still illegal under federal law, 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 extremely 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.
Even Bigger News Than Nov. 8: Last year's elections brought huge victories for legal marijuana, and with them came big paydays for investors in small pot startups. We've already seen gains throughout the market as high as 516%, 523%, 416%, 436%, 293%, and 272% - just to name a few. But the recent news from our neighbors to the north could blow all that away. For all you need to know to profit from the upcoming total legalization of marijuana in Canada, click here.
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