Marijuana dispenser: A classic penny-stock story

If you told someone you expected a tiny company with virtually no assets and income to go from being worth pennies per share to having a market value of more than $2 billion, they’d probably think you were drunk or high.

 

That kind of fantastic story is the stuff of spam e-mails sent by pump-and-dump scammers, or the realm of tiny newsletters — sometimes in cahoots with stock touts — where seemingly every penny stock is a rocket ship ready to launch.

But it’s also precisely what happened last week with Medbox Inc., (US:MDBX) , a company that makes medical-marijuana dispensing machines, which went on a fantastic voyage after it caught a mention in a MarketWatch story on how investors might participate in the expanding legalized pot trade.

Shares surged from about $4 to $215 last week — giving the company a market capitalization of more than $2.25 billion — before company executives played the buzzkill and made a statement noting that the price was soaring more because of the stock’s small float than the company’s “present business economics.”

The stock quickly fell back to $100, and has since been cut in half again, a trend that is likely to repeat itself over and over until the share price is more reflective of its fair-market value. That won’t be much for a company that will be lucky to break $5 million in sales this calendar year.

While that may be the $2.75-$3.50 range the stock was trading in prior to the MarketWatch mention, it could also be closer to the stock’s 52-week low of three cents per share.

Beyond the marijuana connection that fired up the public’s imagination, what fascinates investors about Medbox is that it is the rare penny stock that blew up into something where lucky buyers may have struck it rich.

That’s where the lessons are for investors who are tripping over this story.

There are thousands of companies like Medbox, tiny firms that have gone public but have little to no trading action on an ordinary day. In the old days, investors would have said Medbox traded on the “pink sheets,” a low-tech open marketplace for companies that did not require participants to be registered with the U.S. Securities and Exchange Commission.

Today, it trades on what is known as “OTC Pink,” where the higher level of trading efficiency makes a move like the one seen last week possible. The OTC Pink marketplace has no financial standards or reporting requirements, though it does categorize stocks by the level and timeliness of the information they make available to investors.

Dig into the accountant’s statement in Medbox’s most recent financials, filed Nov. 1, and you will find that “Management has elected to omit substantially all of the disclosures required by accounting principles generally accepted in the United States of America.”

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