CANNABIS SMALL CAPS: Quick Pick a Winner, VODIS PHARMACEUTICALS
A READER asked me how I select quality cannabis stocks to invest in. My response is that most of the time it’s not so much about picking winners as it is about avoiding losers and having an exit strategy.
It is rare that I will see a stock and immediately purchase shares. The last time it happened to me was when I saw that Vodis Pharmaceuticals, Inc. (VDQSD) shares started trading. I put my entire cash position, all of about $40, into 500 shares of Vodis at $.08 per share. Those were pre-consolidation shares.
In light post 1:4 trading I added another 150 shares. The McKenzie Speculation Research Portfolio and Roth IRA now holds about 275 shares of VDQSD (about $110) and it is with high hopes we reach toward the future in another episode of speculative adventures in stock trading.
I am individual investor. I blog about the stocks I will and won’t buy. I have a conservative portfolio in an IRA from which my food money comes. The Research Portfolio is the racehorse. Here I dabble in the risky and speculative land of penny stocks.
There hasn’t been much buzz in the press or media about Vodis, not yet. Haha, it’s a creeper stock and it will hit you soon. This company has been waiting for the other shoe to drop for years.
Vodis is a Canadian cannabis company and it has been waiting for a Health Canada Licensed Producer certification since 2014. They have income producing grow space in Washington state. The word is that they grow excellent marijuana through controlled environment agricultural practices. They could end up being like the Stumptown Coffee of cannabis or so I hope.
Basically, an exciting developmental stage cannabis company that could still be around five years from now. I also liked what I like to call “window dressing.” The management of the company was taking measures to clean the balance sheet and ensure that shares in the company retain the potential for value and growth. Like grooming a dog for a show, these guys are shooting for the blue ribbon. I love Canada.
CAUTION: this is a high risk, speculative investment. All funds invested could be lost. Buyer beware. Research all stocks before you purchase them. I could also lose all my money, and that has happened to me in the past with other speculative investments.
Avoiding Losers is Just as Important as Picking Winners
Having said all that, I usually go through an agonizing process of elimination before I buy a stock. It’s not a pick a winner deal most of the time. I eliminate a lot crappy companies right away just by looking at their float, share price and market price.
When I bought Vodis it had a market cap under $3,000,000 on a float of about 30,000,000 shares. But what motivated me was that it would do the 4:1 reverse and that I would have 125 shares in a company with much higher share prices. Plus these new concentrated shares would be in a company with a float of 7,500,000 shares. Not bad for a potential Canadian Licensed Producer. That’s why I bought.
The float is the number of shares available for trading. Large floats generally benefit the company by quickly adding to market value, and individuals who own large numbers of shares in the company, such as the insiders or directors or venture capital lenders. However, a large float is contrary to the interests of the individual investor.
It may seem like a value to purchase thousands of shares of stocks at pennies per share, but low share prices may indicate that the company’s float is overly diluted. That means that the share price is reduced due to an over supply of shares available for sale. There isn’t much upward movement.
If all other factors (revenues, debt, opportunities, etc.) are equal, the smaller float will reward investors with greater increases in share prices. If a company has several billion shares in its float, it will attain a market cap in the hundreds of millions of dollars before it reaches a share price of $.05. That’s not very exciting.
Dilution and Authorized Shares
Another risk factor is how many shares the company has authorized. A company might have a 100,000,000 share float and have ten times that amount of shares that it could dump on the open market at any time. That’s called “dilution” and it will send the share price down fast.
Sometimes debt instruments cause dilution as debt turns into large numbers of discounted shares.
Pump and Dumps
The best known scam for small stocks is the pump and dump. A company can issue press releases or hire another company to write and disseminate news about the company. When a company starts announcing big news, the price of the stock usually goes up. That’s the pump.
The dump comes when holders of millions of shares in the company start selling into the hype. They are making money at the investor’s expense because once the hype is over, the shares will drop back down to their true value.
A lot of money can be made through lies and overstated opportunities. It’s a scam.
The Basics of Stock Elimination
If a stock passes the basic float and value analysis, further inquiry is required. With cannabis companies and small caps in general one must be alert to scams. Many small caps are new or developmental and may not have significant revenues or business activity. That’s the starting point for interesting investment analysis.
A review of the company’s filings with the Securities Exchange Commission will give additional information to an investor, such as whether the company is current on financial reporting. Many people will not buy a stock if the company is not current on filings, and it is a cause for concern. I have ignored that rule a few times.
Lack of filings deprives investors from the information they need to determine whether to buy shares. If you don’t have the information, the stock is a guessing game.
Basic Due Diligence
I once researched a company that had an address in a skyscraper in Seattle. When I looked closer, I found that the address was essentially a post office box in a company that rents office space and services.
The company’s website looked okay. It was up and functioning. But when I called the phone number for the company, no one would answer the phone. They were screening calls and my calls were disconnected after the first two rings. That’s is a bad warning sign.
A relatively easy due diligence test is to check the company’s website. An operating business today should have an attractive and well organized website. Any products for sale should be displayed there. The website should also have a section where investors can obtain additional information. If the website is amateurish or not active, that is another very bad sign.
Management Responsiveness and Reputation
I have shares in a company in Colombia, New Columbia Resources (NEWC) and the CEO of that company is available to investors via email. I saw on the boards today that the CEO responded to an email in about 15 minutes. Investors have also gone so far as to visit the company in Colombia just to make sure it’s the real deal.
A large part of the early momentum in that company comes through the responsiveness of the CEO. That is a good indication that management is actively involved in operations of the company, it’s not just a shell waiting for opportunities elsewhere.
The reputations and careers of the CEO and other directors of the company is highly relevant to future success. While an unknown may create an exciting business over time, venture capital flows quickly to companies headed by CEOs who know how to make money and have made money in the past.
Shells are holding companies. A good shell is debt free or close to debt free. That is another aspect of window dressing, preparing a shell company for acquisitions, mergers and joint ventures.
Shells are not bad things alone. Getting into a good shell early can be highly profitable, but it can also lead to potential total losses. They could lose money and go away never to return.
Don’t buy junk. Know what you buy. Buyer Beware.
Brokers and investment advisors will rarely recommend the stocks that I am talking about here. They are too risky and they are right. With penny stocks investors are typically acting alone, bearing greater risk and seeking greater rewards, and without all the necessary information.
It comes down to each individual knowing exactly what they are buying when they purchase shares of stock. If you are aren’t careful, you will make bad investments.
The McKenzie Speculator © 2017
The opinions stated here are my own and I have not been induced or compensated in any way by the companies or businesses that are mentioned herein. The article above is not an inducement or call to action to purchase or sell stocks or investments of any form. I own shares in the stocks mentioned as indicated in the text.
I am not a stock advisor or financial expert. I am an individual investor. I am no more responsible for your stocks losses than you are for mine.
The stocks discussed here are small cap, penny stocks. Part of the reason I trade in these shares is the entertainment value of observing corporate financial transactions in potentially high risk, high growth ventures. I may at times discuss companies that have not achieved significant or material revenue streams. Investors in such companies may lose all or significant portions of funds invested in such companies.
Small caps are typically dependent upon key personnel. In the cannabis space companies are dependent upon licenses and regulations that they do not control but which may have severe impacts upon the ability of the company to survive. If a license is revoked or if a crop fails, such events could have immediate negative impacts upon the stock price. Investors must also consider the overt over-taxation inherent in the United States “legal” cannabis industry and invest according.