Your 5-step primer to investing in pot stocks

Great Article from David Pett of the Financial Post.

Reefer madness is back. But this time it’s not high school delinquents going crazy, but equity investors hell bent on marijuana-related stocks.

Shares in companies catering to the multi-billion-dollar pot industry have soared this year due to legislative changes south of the border that vastly reduce legal restrictions on smoking pot for medical and recreational purposes.

Many believe we’re only at the beginning of a far bigger play that could rival the dotcom boom and bust of the 1990s. If so, more and more investors will be keen on getting in on the fun, all the while hoping they don’t get burned.

The Catalyst

The marijuana play gets its spark from significant changes to longstanding laws that govern the use, sale and possession of cannabis in several countries around the world, including, most importantly, the United States, where a number of states have decriminalized the substance to varying degrees and/or created exemptions specifically for medical cannabis over the past few years.

Colorado and Washington have gone so far to legalize the recreational use of cannabis for adults following the approval of state referendums in 2012, but a similar ballot measure in Oregon failed. In Canada, interest in the cannabis industry has been budding in anticipation of Health Canada’s move to allow licenced commercial growing of medical marijuana as of April 1.

“If you’re lucky enough to make a profit, make sure to take it. Bogarting that stock can be costly”

The Opportunity

It’s not easy to pin down exactly how big the global marijuana market is or might be given the shifting legal landscape and its still largely underground nature. But ArcView Market Research pegs the U.S. market for legal marijuana at a current value of US$1.4-billion and projects it will grow to US$2.3-billion in 2014 and US$10.2-billion in five years.

Other estimates south of the border suggest overall sales of cannabis are worth a lot more, perhaps topping US$120-billion a year, putting it on par with the alcohol or tobacco industries, which generated combined revenues of US$263-billion in 2008, according to a Standard & Poors report. In Canada, the medical marijuana market, alone, could be worth more than $1-billion by 2024.

Of course, many of the estimates for pot sales hinge on future demand, both medically and recreationally, which has stabilized in a number of countries over the past decade. The United Nations Office on Drugs and Crime estimated that between 2.8% and 4.5% of the world’s population aged 15-64 in 2009 had used cannabis at least once in the past year. Put another way, that’s between 125 and 203 million tokers.

The Players

There are now dozens of marijuana stocks listed on global equity markets and many more are on the way including Tweed Inc., a Smith Falls, Ont.-based grower and harvester of medical marijuana, which will become the first cannabis-related listing on the TSX Venture Exchange when its announced reverse takeover of LW Capital Pool Inc. is completed.

The biggest selection of stocks in the space by far is found on over-the-counter U.S. markets. Most of these names are penny stocks with market capitalizations well under $100-million, but a few exceptions exist. For example, shares in GW Pharmaceuticals PLC, a British biotechnology firm that makes pain drugs using cannabinoids (a group of compounds present in cannabis), trade on the Nasdaq and the company has a current market value close to US$850-billion.

The Performance

Share returns for many marijuana stocks have been absolutely eye-popping so far this year.

For example, Hemp Inc., a manufacturer of hemp-based consumer products, in January climbed 1,400%, which included a 225% gain during a three-day stretch at the end of the month. Advanced Cannabis Solutions Inc., which leases growing space and related facilities to licenced marijuana growers and dispensary owners for their operations, jumped 1,300% over the first two months of this year. And electronic cigarette maker mCig Inc. was up 900% year to date through Mar. 18.

Lately, these names and others have fallen on harder times, highlighting the risk and volatility inherent in the play.

The Marijuana Index, which tracks the performance of 36 cannabis-related names in the U.S., has a 52-week low of about 0.66 and a 52-week high of nearly 69.8, representing a top-to-bottom gain of roughly 10,500%, but in the last month it has plummeted 72% to 19.46.

The Advice

Let’s be blunt: This is a highly speculative trade that will result in huge losses for careless and uninformed investors. Many of the companies in the space won’t make it as going concerns and shares in those that do are expected to trade sporadically on news about the industry and their earnings prospects come to light.

But the potential risks don’t stop there. In January, the Financial Industry Regulatory Authority (FINRA) reissued an alert specifically cautioning investors about marijuana stock scams.

FINRA particularly warned about pump-and-dump ploys, noting one company that promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market, FINRA said, but the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.

For those investors who do want to play the space, it’s recommended to keep allocations tiny — say, less than 5% of your overall investment portfolio — and to spread the risk across several different names. And if you’re lucky enough to make a profit, make sure to take it. Bogarting that stock can be costly.

Can Tweets And Facebook Posts Predict Stock Behaviour?

Article By Brian O’Connell of Investopedia.com on March 18, 2014
On November 11, 2013, a few minutes after 8 a.m. EST, news leaked out from a Canadian newspaper that Blackberry’s $4.7 billion buyout had collapsed. Wall Street wouldn’t find out for a full 180 seconds, when the newswires picked up the report in real time.

Investment clients at Dataminr, a New York City-based data analytics firm, had a leg up on the rest of the Street. They received an email alert from Dataminr within seconds of the Blackberry news appearing in the Canadian newswire, and many of those clients – especially hedge funds – used the news to short the stock ahead of the rest of the investment community, who were late getting the news on Blackberry (Nasdaq:BBRY).

Another social media data analysis firm, Social Market Analytics, used its coverage of 400,000 Twitter (Nasdaq:TWTR) accounts last August to tell its clients that positive chatter on Apple was percolating just before legendary trader Carl Icahn issued a Twitter statement stating he had purchased a huge chunk of Apple (NYSE:AAPL) stock.

On both fronts, those early birds made a bundle on the alert and showed others that leveraging social media to get the fastest news impacting stock prices wasn’t just a theory, it was a reality.

Four months later, so-called “social sentiment indicators” are making big waves in stock market circles, as more evidence pours in showing that SSI really does give investors who leverage the technology an advantage over those who don’t.

According to a study from Markit, a financial data services provider, from December 2011 to November 2013 positive social media sentiment stocks have shown cumulative returns of 76% compared to -14% from negative sentiment stocks.

Back in 2010, Johan Bollen, a business professor at Indiana University, reported that Twitter data could predict the Dow Jones industrial average with 87.6% accuracy.

“There’s been a dramatic shift in the information landscape,” said Ted Bailey, founder and CEO of New York-based Dataminr. “Information is getting on sources like Twitter early and in advance of what the Street is watching.”

Tweets That Beat the Street

While Facebook offers some data mining opportunities, Twitter is the real hotspot for social indicator analytics. Twitter is a beehive of social media activity, with 645 million active users and 135,000 brand new users every day. Until 2012, however, the technology didn’t exist to splice, dice and slice Twitter feeds to discern fresh trading data. Once social sentiment indicator analysts began figuring out how to quantify all that streaming social media data – and offered the results to professional investors – they made good profits.

Now firms like Dataminr, Datasift and Social Media Analytics employ data analysis technology to sift through Twitter feeds from insiders at publicly-traded companies. Last year, social sentiment analysis hit the big time with financial giant Bloomberg adding Twitter messages to its financial data delivery service. Bloomberg includes tweets from Wall Street analysts and regulators, economists and United States government agencies, boils all those tweets down and ships the relevant data to its roster of clients (mostly stockbrokers, traders and hedge fund managers) who then use that data to stay a step ahead of the competition when buying and selling stocks.

Twitter realizes the value of its huge volume of tweets to the investment community - it earned $47.5 million from its data licensing service in 2012, a 66% uptick from 2011.

According to Tom Watson, a product manager at NYSE Technologies, which recently inked a new partnership with SMA to disseminate social media indicators to financial clients, “The financial services industry has been watching and listening to social media for a while. Now they’re increasingly using and contributing to social media platforms and trying out different trading strategies based on sentiment.”

The technology, unsurprisingly, is highly sophisticated. For example, SMA relies on algorithms designed around key Twitter criteria – including averages, change, volume, volatility, dispersion of tweets and risk – to generate what company analysts refer to as “S-Scores,” which are evaluations based on all of the above algorithms that mirror sentiment on a given stock, over a historical period of time (called a “lookback” period.)

These sentiment scores indicate whether the prevalent chatter is good or bad news for a given stock. With that information in hand, clients can act accordingly and trade the stock based on the sentiment score.

Too Much Data

That’s not to say social media indicators are easy pickings. Joe Gits, founder of Social Media Analytics notes that 90% of all the Twitter feeds that SMA analysts dissect are discarded – it’s the other 10% reveal investment opportunities investors are clamoring for. “The key problem stemmed from the fact there was no way to quantify the data,” says Gits. “Twitter users can’t open up 100 different Twitter streams and accurately analyze the results.”

Social media investment indicators do have a down side, however. It’s fairly easy for con artists to create Twitter feeds similar to publicly traded firms and to throw investors off the right track by tweeting false news about a company, like the buyout of an industry competitor or “foreshadowing” new product launches. Investment fraudsters purchase shares of the stock in advance and profit from Twitter watchers who fall for the bogus news.

The Bottom Line

No doubt, social media investment analysis is an ascending, but very much nascent, technology; so far it’s a winning one for Wall Street’s early birds. Should you sign up for alerts from a social media investment analysis firm? It won’t be easy; most products and services from data providers are geared toward institutional investors, not the Main Street tavern owner fiddling with his 401(k). There are, however, some options. Bloomberg’sEikon trading platform, available to retail investors, offers a Twitter data tracker for free as part of the platform. StockTwits also offers an entry-level Twitter investment news tracking system, but you’ll hear from astute investors and amateurs alike, so, as always, buyer beware.

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