FINRA and the SEC Deflate Marijuana Stocks (For Now)

TIHS WAS WRITTEN BY ALAN BROCHSTEIN

Through most of the first quarter, cannabis stocks were on fire. Unfortunately, the cannabis-rally has fizzled.  Though the sector, as measured by the Benzinga 420 Marijuana Index, has more than doubled since the end of 2013, and is up 300% from the end of 2012, it has dropped about 60% since peaking eight weeks ago. Most stocks have returned to their longer-term moving averages.

Though momentum stocks have been under pressure across the market, the cannabis collapse ties in closely with recently elevated efforts by FINRA and the SEC. While the intent of the SEC to weed out bad actors is good thing for the sector on a long-term basis, their recent actions have left a cloud of uncertainty over the sector that is leading to a broad lack of investor confidence.  

It has been speculated that the SEC could step up its involvement in the sector, and recent haltings have proven to be bad for the sector. Since early March, seven marijuana-related companies have been suspended:

• Mar. 5, 2014 Aventura Equities, Inc. (AVNE)
• Mar. 14, 2014 Petrotech Oil and Gas, Inc. (PTOG)

• Mar. 21, 2014 Citadel EFT, Inc. (CDFT)

• Mar. 27, 2014 Advanced Cannabis Solutions, Inc. (CANN)

• Apr. 10, 2014 GrowLife, Inc. (PHOT)

• May 7, 2014 Cannabusiness Group, Inc. (CBGI)

• May 16, 2014 FusionPharm, Inc. (FSPM)

The first three suspensions didn't really faze the market, as none of the companies were considered market leaders.  The suspension of CANN was a shock to traders, as they are one of the largest companies in term of market-cap. The announcement from the SEC also introduced a new twist:  The SEC can suspend a company's trading even when the company itself has not been accused of wrong-doing.  In the case of CANN, the SEC pointed to the potential actions of a third-party.  

The next, and most damaging, suspension was PHOT, considering they were likly the most widely held stock in the sector.  The company, which is a frequent filer with the SEC, had run up from a Q3 low near $0.03 to a $0.78 high in March. Share prices soared because investors embraced the company’s "GIFT" strategy that provides capital to growers. The SEC halt announcement cited "concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in GrowLife’s common stock."

The sixth suspension, CBGI, was less disruptive since the company was not widely held, but Friday’s FSPM suspension pushed the market to recent lows.  The SEC order was much more specific, calling into question the comapny’s accounting. Denver based FSPM appeared to be very busy filling customer orders, but has never filed any audited statements.  Both CBGI and FSPM traded on the OTC Pink Market.

The cost of suspension, which leads to securities falling onto the Grey-Sheets after their two-week halting, is quite high. CANN trades at about 50% of the price prior to its suspension, while the other stocks that have reopened have lost 80% or more of their prior value.  Suspension of trading is bad enough, but it appears the real punishment is in the aftermath, where investors must trade the stocks without bids and offers.  Even if the SEC were to come out with a "clean bill of health", which it doesn't offer, the company is still required to reapply for a market, which takes substantial time.  It is difficult to blame investors for moving to the sidelines in this environment. The bottom-line is that traders are better served than ever in this environment to double down on their fundamental efforts to make sure that the companies in which they are investing are legitimate.

This is part one of a five part series with 420 Investor Alan Brochstein. Don't forget to register for the 1st Annueal Cannabis Investor Conference...check it out here!