Marijuana Dispenser: A Classic Penny-Stock Tale

They have a small float and low trading volumes, which means they can pop when there is a sudden spike in demand, but which increases the risk that an investor paying a heightened price to get in will see the bottom drop out when the news high starts to fade. It’s the realm of traders and stock jockeys hoping to turn a penny into a nickel before the ride ends.

Still, it’s a very appealing sell to ordinary investors who have seen the major stock markets struggle for years now and who are tired of risking about $90 per share on a giant like ExxonMobil /quotes/zigman/203975/delayed/quotes/nls/xom XOM +0.31% when they just received some pitch on something like Striker Oil & Gas /quotes/zigman/509141/delayed/quotes/nls/sois SOIS 0.00% . That penny stock, which I wrote about several years ago after a big tout job, had its post-promotional pop, then calmed down; today, it is a less-than-a-penny stock, a common outcome for these issues.

Throwing money into these stocks is, for most investors, an exercise in futility. They don’t recognize that they are the ones those traders and sharpies are getting their nickels from. People go into penny stocks and a lot of these small companies figuring that if they throw money into 10 of these things, they will hit one that will make it all worthwhile, said Charles Rotblut, editor of AAII Journal, the publication of the American Association of Individual Investors. The problem is that the successes aren’t 1-in-10, they’re more like 1-in-100. Consider the case of another sin stock that was having some interesting price action last week around the same time as Medbox.

Drinks Americas Holdings /quotes/zigman/11137226/delayed/quotes/nls/dkam DKAM -7.50% which I picked solely for having some of the same vice appeal as a marijuana distribution company develops and distributes alcoholic premium beverages, and is involved in everything from Ed Hardy Silver Tequila and Willie Nelsons Old Whiskey River Bourbon to Kid Rocks American Badass Beer. It trades on the OTCQB, and last week hit a 52-week low before announcing a tequila deal that popped the stock from roughly 10 cents per share to nearly 20 cents on about three times its normal trading volume. This week, as Medbox was coming down from its high, Drinks Americas was sobering up to a stock price closer to 13 cents.

To read more, visit http://www.marketwatch.com/story/marijuana-dispenser-a-classic-penny-stock-story-2012-11-21

Posted in: Investing

Comments are closed.