Are Marijuana Stocks Shady? - TheStreet

--Update 5:00 p.m.

NEW YORK (MainStreet) — All eyes are on the rapidly burgeoning cannabis industry, and with medicinal marijuana sales approved in 20 states (plus Washington, D.C.) and recreational use green-lighted in Colorado and Washington state, investors have the munchies for the best weed stocks. Call it spliff dividends.

But watching this slow burn quicken has traders trying to filter the duds from the good stuff without impaired judgment. There are fickle "Wolf of Weed Street" penny stocks out there and even two mj stocks traded on the Nasdaq, GW Pharmaceuticals (GWPH) and Full Circle Capital Corporation (FULL).

People are searching for pen baggers to see their holdings get high. The take-off can be loftily kite-like: GWPH is up 517.05% since May 3, 2013 for instance. In terms of intraday trading, Hemp Inc. (HEMP) has almost doubled Monday to 0.158. And search $FULL on Twitter or dig into a day-trader chatroom, and you will find clamoring excitement expressed over the ticker.

"Long 6100 Shares $FULL $7.65 avg going to be another $GWPH swinging for $20 if weed stock momo keeps going. $MJNA$PHOT$CANN$MDBX$FSPM"

Alan Brochstein, founder of marijuana stock subscription service 420 Investor, is bullish on the sector's future in light of the demand.

He started investigating marijuana stocks last February and was shocked by his findings.

"I was blown away by the valuations," he said. "I felt like the guy who comes from Mars and lands on Earth."

But what a difference a year makes; that alienation has morphed into a recognition of the sector's upside potential.

On a recent trip to Colorado, he saw that eighth-ounce bags of marijuana that two weeks ago sold for $20 now sell for up to $65. The demand is there.

Still, the industry is a Wild West of sorts, a young industry.

"One person says, 'I've only been in the industry for two years' and another says, 'I've been in for four years'—that's like being in the Vietnam War," Brochstein said. "Four years is an eternity."

When Dr. Sanjay Gupta came out in support of medical marijuana this summer, the sector got a huge boost, according to Medbox (MDBX) CEO Bruce Bedrick.

The legislative support and rallying cries around the legalization and decriminalization of the herb will allow for added sales.

"We need to move forward in our society," Bedrick said. "[Sick people] feel hopeless, and this gives them the way to express their voice in democracy."

A former holistic chiropractor, Bedrick, 45, got into the marijuana business after seeing his patients at the Anti-Aging and Wellness Center in Scottsdale, Ariz. suffer from chronic and degenerative disease.

Medbox has a patented system to dispense marijuana medication in a vending style and also offers consulting services, but Bedrick's partner, Vincent Mehdizadeh has plead no contest to several criminal charges such as breaking and entering, solicitation of a prostitute, trespassing and credit card fraud.

The company wants to meet the Securities and Exchange Commission (SEC) compliance measures to move beyond its OTC position and get traded on a national exchange.

This afternoon, Medbox announced FINRA processed issuance of a special stock dividend to shareholders (36.60 +0.60), with a record date of December 18, 2013 and pay date of February 3, 2014. The class of shares to receive the dividend is the common shares, not the preferred class of shares the executives hold.

Still, there's a nebulous haze surrounding Medbox and some of these pot companies. Can you trust them with your money in a sector that is as yet not fully tried?

The weed companies span an array of areas from agriculture to technology, from pharmaceuticals to consulting, and it's not simply dealing in narcotics that makes a marijuana company shady. There are winners out there to make green off the green; an extra dose of discretion here will go a long way.

TheStreet is launching a marijuana stock index, and as a teaser to our guide, we've weeded through the options and presented three solid possibilities for you below.

1: The Stalwart

GW Pharma (GWPH), traded on the Nasdaq with a market cap of $969 million, is the mj market veteran – around since 1998 and public since 2001. It closed at $50.09 per share on Friday. This seasoned lion of the pot space is 100% focused on cannabis from a medical perspective and has a unique bent not just on THC but on CBD (the component of marijuana thought to be the most salubrious). The company has fantastic patents on its delivery mechanism and great distribution partners with companies like Novartis and Bayer. Approved in 22 markets world-wide, GWPH has developed Sativex, an FDA-vetted drug, set to roll out stateside in 2015. To boot, the future looks bright, with the company's Epidiolex marijuana drug (which treats epilepsy) given FDA orphan status: that means it has seven years of exclusivity to test the drug in clinical trials. A one trick pony, this company is not. This drug is set to hit market in 2019.

2: The Black Swan

Full Circle Capital (FULL) is tangentially involved in marijuana but totally a big pot play — and really not discussed. Traded on the Nasdaq with a market cap of some $70 million, FULL is a business development company that makes loans with certain tax advantages. It closed at $7.36 on Friday. FULL funded up to $30 million to Colorado-based Advanced Cannabis Solutions (CANN), which bought a triple net lease on agricultural lands for cultivation of cannabis. The company did a year of due-diligence on CANN before making loan, demonstrating prudence.

FULL offers significant exposure to marijuana industry but without the whimsicality of those names on the pink sheet.

CANN ended up with 1 million warrants (stock was at $18) and borrowing at 12% from FULL. The loans are convertible into the stock at $5 a share, so 25% (or $7.5 million) of the stock is favorable. The rest will be at market. Working with FULL also offers the advantage of working with a very white shoe environment and not some of the sketch-city attributes seen in the pot industry.

3: The Little Bud That Could

GrowLife (PHOT) is traded over the counter with a market cap of some $221 million and a Friday close price at $0.38. The company started out 26 years ago as a small company selling home-based terrariums in High Times Magazine. It is now the largest ancillary business in the U.S by revenue and specializes in equipment to cannabis growers and marijuana dispensaries nationwide. Last week, PHOT invested in a Canadian plant expected to produce up to 1.3 million pounds of medical marijuana annually with $40 million in restricted stock.

"We're a well recognized brand in an industry that has changed dramatically," CEO and chairman Sterling Scott told MainStreet. "It's no longer a product or business marketed principally to a sub-culture in the U.S. that wants to grow marijuana in the secrecy and privacy of their home."

--Written by Ross Kenneth Urken for MainStreet