Schafer: Will PHOT be hot? Speculators sure hope so

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: May 31, 2014 - 2:00 PM

There’s an art to selecting the right ticker symbol for a stock, and whoever decided on PHOT as the symbol for GrowLife Inc. clearly has the gift.

GrowLife is in the suddenly hot marijuana business, and PHOT clearly beats WEED or HERB.

Not that its equipment and supplies for what it calls “urban gardening” are all that hot. Its first-quarter bottom line was a loss of nearly $38 million, including a big one-time event, on sales of about $2.4 million.

What’s really hot is speculation in stocks like PHOT.

The Securities and Exchange Commission recently felt compelled to toss a bucket of cold water, issuing an investor alert about “the potential for fraud in microcap companies that claim their operations relate to the marijuana industry.” It has already suspended trading in the stocks of several marijuana-related companies this year, including California-based GrowLife and Colorado-based FusionPharm.

That speculation and stock promoting have come into the marijuana business in a big way is hardly surprising. It’s a new business without any established players. Even a reasonable stock buyer could be sold on the idea that some sort of technological development is poised to really take off, like a new process or cannabis-derived product.

And, gosh, everyone knows that the marijuana industry is just exploding, right? Just look at the headlines. Even conservative Minnesota now has a medical marijuana law.

Marijuana would seem to be a major market opportunity for corporate America — were it not for the fact that marijuana remains illegal under federal law. A good example of the roadblocks is that the U.S. Bureau of Reclamation just took steps to ban using federal water for legal marijuana cultivation.

With the likes of Archer Daniels Midland and General Mills sitting it out for now, many of the companies in the industry are tiny ones with stocks that trade over the counter. A search on under “canna” revealed 10 companies: CannaVest Corp., Cannabis Capital Corp., Cannabis Technologies, Inc., and so on.

Let’s be perfectly clear, this is not to suggest that these companies are all frauds. They may be run by well-meaning executives trying to build a business. But no sober investor would touch any of them.

At the time the SEC halted trading in GrowLife in April, the agency said it made its move because of its “concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in GrowLife’s common stock.”

It wasn’t the management team planning any such manipulation, GrowLife CEO Sterling Scott said in a late-April statement as trading was to resume. He explained that the SEC apparently had been concerned about some third parties.

“I can confirm that GrowLife was not involved in the planning of any potentially manipulative promotional activity,” he added, “nor does it have any knowledge of any planned third party promotional activity of any kind or type, proper or improper.”

This statement seems to raise as many questions as it answers, maybe none more interesting than what exactly constitutes “proper” promotional activity.

One could maybe argue that an equity research report from a big investment firm like Morgan Stanley that rates a stock a buy is a form of promotional activity, and it’s clearly proper. Maybe a CEO’s opening statement on the quarterly conference call for investors is properly promotional, too.

But in the land of the penny stocks it can mean 55-page and 28-page research reports on GrowLife on the letterhead of a firm called Grass Roots Research* and Distribution, Inc., easily found with a few mouse clicks.

These have the look and feel of brokerage firm research pieces, and the 55-pager makes a convincing “plop” sound when dropped on a conference room table.

“PHOT is expected to be at the forefront of this marijuana infrastructure industry,” Grass Roots states in a report dated last October. “PHOT is partly targeted at the massive $45 billion marijuana market.”

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