FINRA And The SEC Deflate Marijuana Stocks, For Now
This is part one of a four-part series with 420 Investor Alan Brochstein.
Through most of the first quarter, cannabis stocks were on fire.
Unfortunately, the cannabis-rally has fizzled. Although the sector, as measured by the Benzinga 420 Marijuana Index, has more than doubled since the end of 2013, and is up 300 percent from the end of 2012, it has dropped about 60 percent 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 SEC's intent to weed out bad actors is a good thing for the sector on a long-term basis, the recent actions have left a cloud of uncertainty -- that has led to a broad lack of investor confidence.
It has been speculated 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: Aventura Equities (OTC: AVNE)
Mar. 14: Petrotech Oil and Gas (OTC: PTOG)
Mar. 21: Citadel EFT (OTC: CDFT)
Mar. 27:Advanced Cannabis Solutions (OTC: CANN)
Apr. 10: GrowLife (OTC: PHOT)
May 7: Cannabusiness Group (OTC: CBGI)
May 16: Fusion Pharm (OTC: FSPM)
The first three suspensions didn't really faze the market, since none of those companies were considered market leaders. The suspension of Advanced Cannabis Solutions was a shock to traders, however, as it is one of the largest companies in terms 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 Advanced Cannabis Solutions, the SEC pointed to the potential actions of a third-party.
The next and most damaging suspension was GrowLife, considering they were likely 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, Cannabusiness Group, was less disruptive since the company was not widely held, but Friday’s Fusion Pharm suspension pushed the market to recent lows. The SEC order was much more specific, calling into question the company’s accounting.
Denver-based Fusion Pharm appeared to be very busy filling customer orders, but has never filed any audited statements. Both Cannabusiness Group and Fusion Pharm 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. Advanced Cannabis Solutions trades at about 50 percent of its price prior to suspension, while the other stocks that have reopened have lost 80 percent 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 would still be 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.
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