How to Spot a Pot Stock Scam

Photo by Vortex Farmacy. 

The legal cannabis market is booming.

No matter how you slice it, nothing is growing faster and nothing is more lucrative.

In fact, last year, sales from the North American cannabis industry came in around $6.7 billion. By 2021, they are expected to exceed $20 billion. That’s a compound annual growth rate of about 25 percent. That’s bigger and faster than what we saw back in the dot-com days. And it’s bigger than anything else you can get into today.

But with this tremendous growth and opportunity comes the inevitable conga line of hustlers and shady stock promoters.

Now that hundreds of investors have become millionaires by investing in the cannabis space, everybody wants a piece of the action. And with good reason.

I’ve certainly made a small fortune by investing in this space. That being said, most of the cannabis stocks you can buy today are complete dogs.

Solid Cannabis Stocks

There are a number of solid cannabis stocks, including Canopy Growth Corporation (TSX: WEED), Aphria, Inc. (TSX: APH) and GW Pharmaceuticals (NASDAQ: GWPH). All three of these stocks have made early investors a lot of money.

But for every one of these legitimate players, there are dozens of others that are nothing more than empty promises and pump & dumps.

Now, for the sake of clarification, pump & dumps are not exclusive to the cannabis industry. But because this industry is still so new, it has become fertile ground for pot stock scams.

How to Spot a Pot Stock Scam

I’ve been investing in the legal cannabis space for about three years now. And my track record is very impressive. To date, I’m sitting on five gains in excess of 300 percent.

But I’m not telling you this to brag. I’m telling you this because in order to find these winners, I had to sift through hundreds of pot stock scams.

In fact, there are so many pot stock scams out there that I decided to write this piece today to help you identify the markings of a pot stock scam.

If you’re looking to invest in the legal cannabis space, here are few warning signs of a scam…

1. Owners have made little to no personal investment into the company.
2. Management won’t respond to emails or phone calls.
3. The company spends more time pumping out press releases than actually building its business.
4. Companies involved in growing or selling the plant haven’t applied for the proper permits and licenses to legally operate in their respective states or provinces.
5. You read about a particular pot stock that’s “going to crush it” in a note written by a stock promoter who’s been paid a hefty sum to promote that particular stock.

How to Spot a Pot Stock Winner

Because the industry is still very young and still operating illegally in the eyes of the U.S. government, there is a considerable amount of risk for investors. So if you can’t stomach the risk, stick to buying mutual funds, blue chips and CDs. You won’t make much—you will probably not even make enough to keep up with inflation—but your risk level will be considerably lower than if you invest in the cannabis market.

That being said, if you’re looking to make some real money and you can stomach the risk, there is no greater investment opportunity than the cannabis market. As long as you know how to spot a winner.

Here are a few things I look for when investigating a potential investment opportunity in the cannabis space.

1. Owners have made considerable personal investments into the company.
2. Management is quick to respond to questions and concerns.
3. If the company is a grower or seller, it is either fully licensed or well on its way to becoming fully licensed.
4. The company does not spend money to hire shady stock promoters.
5. The company is well capitalized and has enough cash in its war chest to operate successfully in what has become an incredibly competitive market.
6. Management is morally and ethically invested in the end of cannabis prohibition. I don’t trust any cannabis company that’s run by folks who are not legalization advocates.

The bottom line is if you want to profit from the legal cannabis boom, you must be well informed and know exactly how to separate the winners from the scams.  Because while you can make a lot of money in the cannabis game, if you’re not careful, you could lose a lot, too.

Fortune does favor the bold, but the bold must be enlightened. Follow me on Twitter @jeffsiegel, where I try to enlighten cannabis investors every day.

RELATED: Cannabis Investing Is a Moral Imperative
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