Why you should forget about buying Canadian marijuana stocks

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Canadian marijuana stocks offer some speculative appeal — but here’s why we think you should avoid them

AMSTERDAM - AUGUST 26: Candy and cookies with marijuana for sale in the coffeeshop on August 26, 2014 in Amsterdam.

As you probably know, several U.S. states have decriminalized or legalized marijuana use and have begun authorizing legal production and sale of the plant. In Canada, marijuana has been legal for medical use for some time, and we are occasionally asked about Canadian marijuana stocks.

This change in the law is bound to lead to a shift in current and future marijuana production, from the underground economy to the legal economy, where it can be regulated, taxed and invested in. Tax revenues are already starting to roll in, but we haven’t found any Canadian marijuana stocks worthy of investment. So far, most of what we’ve seen are stock promotions.

We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” stock scam almost seems like an MBA-style case study on how to launch one of these frauds online.

We won’t name the penny stock company that is the subject of the promotion campaign, since it claims it’s not involved in the fraud. Let’s just refer to it as “Pot o’ Gold,” or POG for short.

The POG spam emails we’ve seen use the following techniques:

One group of emails seems to be misdirected personal communications — one friend tipping off another to a good thing in the stock market. Though they come from unknown senders, these emails address the recipient by first name. The recipient can take this to mean that they have received this valuable information by mistake. Or they can tell themselves it’s from a friend or acquaintance they can’t place. Either way, this belief tends to legitimize the message in the recipient’s mind. Everybody would like to believe they have received valuable information at no cost, even if it’s only by mistake.

Another group carries the names and logos of legitimate news sources like Bloomberg News and the Fox Business Network, and/or legitimate financial companies such as TD Ameritrade and Scottrade. The text in these emails consists of blatant touting of POG, something you’d never see in any communication from a legitimate news or financial organization.

Many carry identical or near-identical messages that tout the stock, but appear to come from a variety of senders. Most senders have a commercial-sounding name. Some carry a message that you might see from a legitimate emailer, such as “[fictitious name of sender] never sends unsolicited email. You received this email because you requested a subscription to [fictitious publication name] from [fictitious name of sender]”.

Many of these emails carry blocks of random text printed in light grey or off-white. You can barely notice these passages, much less read them, since there is little contrast between the text and the white background. This is a spammer technique for outwitting anti-spam software.

This type of software looks for words and symbols that are often found in spam. Each type of spam has its typical earmarks. Common words in stock-market spam are buy, profit, money, analysts and so on; common symbols are dollar signs and exclamation points. By adding random text to the emails, the spammers lower the proportion of spam-like words and symbols, hoping to stop anti-spam software or search engines from detecting the spam and consigning it to the junk email folder.

When you read spam emails, you have to wonder who could be taken in by such patently false deception. In fact, two kinds of people are especially vulnerable: those who don’t read much or well, and those who invest on impulse. To avoid being taken in, it pays to read more, and to think before you invest.

The growing trend toward marijuana legalization has spurred a great deal of investor interest, including a recent question from a member of our Inner Circle. However, we have yet to come across marijuana investments we are prepared to recommend as buys.

A marijuana stock that faces profit issues

Mettrum Health Corp. (symbol MT on Toronto; www.mettrum.com) began trading on the Toronto Venture exchange on October 2, 2014.

The company is a licensed producer of medical marijuana in Canada. Its only production site is a plant in Bowmanville, Ontario. It is now building a second facility in the area. A third operation is planned for Creemore, Ontario.
Mettrum sales are rising, but its continues to lose money. That’s because the company continues to invest in its operations, including spending more on marketing and facilities.

We don’t recommend shares of Mettrum Health.

Investment advice: A larger, more profitable marijuana market could set back small growers

Medical marijuana producers offer some speculative appeal. Many investors see legal marijuana production as a wide open field with low barriers to entry, other than satisfying the regulatory requirements. This, though, is no guarantee of profit.

Small marijuana producers have to overcome all the usual obstacles that small and start-up companies face. But if the legal marijuana market grows large and profitable enough, major agricultural and drug companies are likely enter the field and take sales away from small growers.

Do you own Canadian marijuana stocks? Do you have any information to share on your experience? Please add your thoughts to our comment section, which you can find after the original version of this blog at this link at TSInetwork.ca.

patmckeough

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books.

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