January 13, 2014

Guest Column: 5 Ways Publicly Traded Cannabis Companies Can Gain Credibility With Investors

alanbrochstein
By Alan Brochstein

Publicly traded cannabis stocks are off to an incredible start this year, with many of them doubling or tripling and some increasing by as much as tenfold.

Excitement about the implementation of legal cannabis in Colorado has fueled what appears to be a bubble, with demand from new investors overwhelming the limited supply of shares available for purchase. It was only 11 months ago that the market enjoyed similar ebullience, but that ended quite poorly as most stocks in the sector lost in excess of half their peak value in the ensuing months.

There were several reasons for the collapse from the February peak last year, but one of the key challenges was that many of the companies failed to deliver on promises, losing credibility with their shareholders.

With the recent sharp rise in prices, companies would be well-served to consider these five steps to become more shareholder-friendly.

#1. Act with Accountability

The fundamentals of the companies currently traded publicly have not been particularly impressive relative to the overall industry. Most investors understand that many of these organizations are truly developmental.

In this type of environment, press releases that detail the intentions of companies tend to capture a lot of attention. Unfortunately, there are too many examples of companies in the space that never live up to their promises and, rather than address the issues in the future, they end up just discussing new future initiatives.

One of the worst examples last year was the early-in-the-year forecasts by two of the better-known companies in the sector that missed by a mile. These two companies never updated their overly optimistic outlooks either, which contributed most likely to their weak share prices over the balance of the year.

nmbcvideoad2 Guest Column: 5 Ways Publicly Traded Cannabis Companies Can Gain Credibility With InvestorsContrast that with another company that reported weak results in the third quarter relative to its outlook but owned up to it on a live internet show as two executives explained the reason, taking full responsibility.

#2. Reduce Complexity

Investors like a simple story. When it comes to cannabis-related stocks, most of the companies seem to understand this concept, but a few have set up corporate operational structures that make it very difficult to understand what shareholders are actually buying when they invest. Additionally, many companies have complex capital structures, with insiders controlling them through securities such as convertible preferred stock.

 #3. Increase Transparency

Cannabis-related companies tend to trade “over-the-counter,” as only one – GW Pharmaceuticals – is listed on a major exchange. Many of these OTC stocks file with the Securities and Exchange Commission (SEC). But a few don’t, trading instead on the “pink sheets,” where the reporting requirements are minimal.

Some of the largest publicly traded companies are included in this latter group. To gain credibility, it is imperative that they file with the SEC. Additionally, investors would be better served if these companies disclosed information that SEC filers are required to share, even if as a “pink” company they aren’t required.

Examples of this type of information would include related-party transactions, insider ownership and litigation. Finally, companies in the sector will increase their credibility by holding regular communication with their shareholders, particularly via forums that allow interaction.

#4. Improve Corporate Governance

The way a company runs itself can provide investors an important signal. Companies in the sector need to show leadership at the top, particularly on the board of directors. Some of the largest companies in the space in terms of market capitalization have failed to establish an independent board. Additionally, some companies in the space allow inherent conflicts of interest to persist.

#5. Focus on the Business, Not the Stock

Many investors wonder about the true nature of some of these cannabis-related companies, as it appears that several have weak business models and are more intent on selling shares than building a sustainable business. Too many companies rely on stock promotion, with a barrage of sensational press releases, paid stock promotions via social media or paid research.

One particularly egregious example was a company that began trading publicly following a reverse-merger last summer and promoted its stock symbol on radio ads in several Midwestern states.

With stock prices elevated again, companies in the sector have more at stake than ever before. Adopting a more shareholder-friendly approach may help shield the companies when the heavy tailwinds of positive investor sentiment eventually abate. Additionally, these lessons have not been lost on new companies entering the public markets, and several recent new additions have positioned themselves as employing a better approach.

The bottom-line: Companies can get away with a lot in a bull market, but if publicly traded cannabis industry participants want to be credible, they need to do a better job on several fronts.

Alan Brochstein is a Chartered Financial Analyst and runs 420 Investor, a community of investors focused on publicly traded cannabis stocks


16 Comments:

  1. Quote,

    ” Contrast that with another company that reported weak results in the third quarter relative to its outlook but owned up to it on a live internet show as two executives explained the reason, taking full responsibility. ”

    Nice PHOT shout out, or whisper out, either way, so true, PHOT not only did one interview with you, but two, since then.

    And played no dodge ball, but answered nearly every question that was thrown at them.

    As you know, Kurt Divich, is top notch IR as well, and has answered every email/call, I have put out thus far.
    Unlike, 99%, of most other pennystock Companies!

    Then again, most Pennystocks are not SEC Fully
    Reporting like PHOT.

    In addition, New PHOT President, and former Microsoft Exec, Marco Hegyi, gives PHOT one
    of the best Management teams, in
    Pennyland, let alone among MJ stocks.

    And should also be noted, even though PHOT missed it’s Third Quarter projections, PHOT
    was Top in Revenues among most of it’s peers.

    Continue the good work, AB!

  2. Excellent points. Another idea: Bring in board members with experience managing developed, successful companies in related fields. Good work Alan.

  3. Google ‘Brochstein Foundation IRS’ and Check out the portfolio of 420investor.com anslyst Alan Brochstein previous performance as Director. Why anyone would take advice from a guy who infamously burns through $800K of his mother’s foundation and then has the audacity to speak about credibility, transparency and accountability. Bottomline, the cannabis industry needs to vet the people they push to the front before someone else does it.

  4. Been researching & investing in MJ stocks since July 2011. Doing much better since I joined 420investor.com Alan’s site.

  5. Norman Gates, let it go bro.
    MJNA may be up right now, but behind the
    skirt, it ain’t pretty.

    AB has been part of the main driving force
    behind the success of Marijuana related Stock
    Sector, and his 18 for 18 trade calls to his
    over 200 420 Investors, is not to shabby either.

    Keep up the good work Alan!

  6. TRTC is best in class.

  7. I’ve been a 420 investor for less than a month and made enough in profits to pay for the subscription for the next 13 years. Alan has not only taught me about this sector but about smart investing in general. I guess that’s why people take advice from him.

  8. …many of these stocks are still in its embryonic stage. A little research on one’s own can go a long way improving investment choices during this nebulous period. Time and eventual Federal government acceptance will further help these stocks.

  9. lost me as a reader

  10. This guy has been the biggest problem in all of these stocks. How he – you regurgitate things and do not stand together for what really is best for the public if regulated with common sense is appalling.

  11. Now I do worry about credibility in this sector and sight.

  12. All your doing is supporting day traders and short sellers to kill young company’s. DD yes but when a company has good news and on beat this guy comes out and rehashes old news and pretends to be a friend to the investor time your sight did it’s DD IMO

  13. [email protected]

    Does anyone know of which 2 companies he speaks of here: “One of the worst examples last year was the early-in-the-year forecasts by two of the better-known companies in the sector that missed by a mile….”

    And again here, what company does he speak of?: “Contrast that with another company that reported weak results in the third quarter relative to its outlook but owned up to it on a live internet….”

    Thanks.

  14. If Sterling Scott increases shares from 1billion to 3billion for Growlife (phot)not good.

  15. I don’t understand why AB doesn’t mention the company’s names.

  16. lakeside is right on. Don’t waste your money on this guys newsletter unless you want to learn what not to do.

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