NEW YORK (TheStreet) -- Investing in pot stocks may seem like a good bet given the push to legalize the drug across the country and new commercial activity from dozens of companies creating new marijuana products. But these stocks are some of the most volatile and investors should proceed with caution.

Bloomberg identified 55 publicly-traded companies flooding the marijuana market with products and services for those keen on cannabis, from pharmaceutical companies to tech companies. That said, there are only two you should even consider looking at.

Shares of many marijuana-related companies grew like weeds last year following the launch of recreational marijuana sales in Colorado, on Jan. 1, 2014, and in Washington State, on June 1, 2014. (Both states passed laws to do so in 2012.) But buying into so-called pot stocks has given investors a buzzkill as the industry remains in a wait-and-see mode regarding federal laws.

Four states -- Colorado, Washington, Alaska and Oregon -- currently allow the use of marijuana both medically and recreationally, while a host of other states allow for it for just medicinal purposes.

The vast majority of companies on Bloomberg's list of 55 are not rated by TheStreet Ratings, TheStreet's proprietary ratings tool, because they are too new to make a reliable assessment of risk-adjusted performance. (Rated stocks must trade on a major U.S. exchange and have filed full quarterly financial statements for at least five quarters.)

TheStreet Ratings works by projecting stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Only two Bloomberg pot stocks are rated by TheStreet Ratings and, unfortunately, neither is probably worth buying. In fact, they are so poorly rated, that even at the low prices at which they are available, if you own them, you should sell them. Below, more information on these two stocks and why you should sell. 

Note: Reports are dated Apr. 19, 2015. Year-to-date returns are based on April 20, 2015 closing prices.

 

VPCO Chart VPCO data by YCharts

1. Vapor Corp. (VPCO)
Market Cap: $29.3 million
Rating: Sell, D
Year-to-date return: -28%

 

Vapor Corp. designs, markets, and distributes vaporizers, e-liquids, electronic cigarettes, and accessories primarily in the United States and Canada.

"We rate VAPOR CORP/NV (VPCO) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, poor profit margins and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Tobacco industry. The net income has significantly decreased by 1821.0% when compared to the same quarter one year ago, falling from $0.28 million to -$4.84 million.
  • The gross profit margin for VAPOR CORP/NV is rather low; currently it is at 24.20%. It has decreased significantly from the same period last year. Along with this, the net profit margin of -180.85% is significantly below that of the industry average.
  • Net operating cash flow has significantly decreased to -$1.94 million or 96.35% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Tobacco industry and the overall market, VAPOR CORP/NV's return on equity significantly trails that of both the industry average and the S&P 500.
  • This stock's share value has moved by only 88.47% over the past year. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.

 

 

 

 

XXII Chart XXII data by YCharts

2. 22nd Century Group Inc. (XXII)
Market Cap: $88.7 million
Rating: Sell, D
Year-to-date return: -15.8%

22nd Century Group, Inc., a plant biotechnology company, focuses on tobacco harm reduction and smoking cessation products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding.

"We rate 22ND CENTURY GROUP INC (XXII) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has significantly decreased to -$2.79 million or 144.40% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • XXII's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 64.32%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Tobacco industry and the overall market, 22ND CENTURY GROUP INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • XXII, with its very weak revenue results, has greatly underperformed against the industry average of 22.7%. Since the same quarter one year prior, revenues plummeted by 100.0%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • XXII's debt-to-equity ratio is very low at 0.07 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, XXII has a quick ratio of 2.41, which demonstrates the ability of the company to cover short-term liquidity needs.

 

 

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