Analyst: Don’t get high on pot stocks or you’ll get burned

As a number of companies race to get into the legal marijuana business, some investors are getting high on their stocks. But a leading Wall Street investment adviser warns many investors are in for a bad trip.

“People are really expecting positive things from these companies but they’re not really looking into the details seeing if these companies are making money, which they’re not, and how much they stand to benefit from the changes in the landscape,” says Charlie Bilello, Director of Research at Pension Partners, LLC.

Bilello tells KIRO Radio’s Dave Ross some investors are simply looking for the next hot trend or speculative theme, especially those who missed out on the huge gains of the bull market of the last five years and think marijuana companies can help them get rich quick.

Small companies with catchy, marijuana related ticker symbols like PHOT, HEMP and MJNA have exploded onto the scene, offering everything from growing supplies to electronic smoking devices. And Bilello warns investors are driving up their stock prices far more than the companies are worth.

“These small investors are likely to get burned,” he says. “I looked into a handful of these names, and none of them are making any money […] some of them have increased so much in market value due to the speculative rise that they’re trading well in excess of the entire market for marijuana.”

Finding information on many of these smaller companies is difficult, and federal regulators issued a warning earlier this year about potential fraud and and unattainable gains promised by upstart pot companies. Many are so small they can fly under the radar of securities regulators.

In the warning by the Federal Industry Regulatory Authority, regulators cited one company that that promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013.

“These releases publicized rosy financial prospects and the growth potential of the medical marijuana market. The company was also touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock ‘could double its price SOON’ and another asserting the stock was ‘poised to light up the charts!’ Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan,” the FINRA release cautioned.

Bilello says he has not doubt there will be a number of companies that ultimately profit on the growing marijuana industry, but he says most small investors don’t have the time or the knowledge to sort out the winners from the losers.

“It’s likely to be someone they’re not expecting, a larger company finding a way to capitalize after smaller companies try and fail,” he says.

So what should most investors do?

“I think the best case for investors is to pretend they never heard of these stocks for now and revisit it when the landscape is clear, when you see more states legalize, when you see how these companies can actually make a profit from this industry.”