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Seeing green; Speculators swarm, regulators warn as pot shares go sky high.

Byline: Nick Taborek, Callie Bost & Nikolaj Gammeltoft

They've got high hopes.

Bruce Perlowin, chief executive officer of Hemp Inc., who has seen his stock soar 205 percent to 8 cents in the last three days, says investors are suddenly bidding up marijuana companies because they want to find "the next Microsoft.'' Robert Frichtel, his Advanced Cannabis Solutions Inc. up 144 percent after posting $455 in sales last quarter, said "euphoria'' is driving gains that in some cases top 1,700 percent.

"The demand for marijuana is insatiable,'' said Perlowin, a once-jailed smuggler who filed last month to sell 12 million shares of the Las Vegas-based company even as its market value holds at 99.97 percent below the world's biggest software maker. "You have a feeding frenzy for the birth of a new industry.''

While regulators warn of scams, some of the biggest percentage gains in the stock market this year are being enjoyed by investors speculating on marijuana penny stocks. GreenGro Technologies Inc., which provides management services for medical dispensaries, has soared 1,714 percent to 80 cents. Tranzbyte Corp., which sells pot in Colorado, has gained more than 310 percent in five trading sessions, crossing above a penny for the first time in 11 months.

Frenzy is afoot after Colorado became the first state to legalize sales to anyone 21 and older, and New York considered reviving a law to allow some hospitals to use the drug for patients with cancer, glaucoma and other illnesses. Among 10 marijuana-related stocks that have rallied more than 20 percent this year, most are priced below $1 and trade over the counter.

"It's people freaking out, thinking they found the next home run and doing no research,'' Frank Ingarra, head trader at Greenwich, Conn.-based NorthCoast Asset Management LLC, said by phone. "There might be one or two that survive, but having seen crazes like this, people have been burned by them a lot. The average investor should think twice.''

Be wary

The Financial Industry Regulatory Authority issued an alert in August, saying investors should beware of potentially fraudulent purveyors of stocks connected to pot and related services. Scammers may be promoting the shares, then selling them in what's called a "pump-and-dump'' scheme, the brokerage watchdog organization said in an emailed statement. It didn't name any companies.

Investors should be particularly wary of executives who have been incarcerated, according to Finra's alert, which mentioned an unnamed CEO who spent nine years in prison for running one of the largest drug-smuggling operations in history. Perlowin of Hemp Inc. said in an August interview that he thought the group meant him and that it's "absurd'' to criticize him for his experience dealing marijuana.

Hemp Inc. focuses on industrial hemp used in clothing and camping gear, Perlowin said.

"I don't really know that there's a lot of stock-market money to be made in this,'' Brian Barish, president of Denver-based Cambiar Investors LLC, which manages $9 billion, said in a telephone interview. "I've definitely seen some interest and gotten a couple calls. Most of them have been with chuckles on the other end of the line.''

Eighteen states and Washington, D.C., allow the medical use of marijuana and 11 permit sales through dispensaries, according to the Denver-based National Conference of State Legislatures. In Massachusetts, the legal process is underway to sell medical marijuana at dispensaries. National legalization has the potential to start a $35 billion to $45 billion a year industry, according to Bloomberg Industries.

Pot for recreational use sells for an average of $400 an ounce, compared with $200 an ounce that Colorado retailers collect for medical marijuana, according to Aaron Smith, executive director of the National Cannabis Industry Association, a Washington-based trade group.

Building momentum

Medbox Inc., which has a market value of $626 million, climbed to a one-year high of $73.90 on Jan. 7. The West Hollywood, Calif.-based company had about $260,000 in profit on sales of $2.1 million in the third quarter of 2013, according to a Nov. 19 statement. The shares slumped 19 percent to $43.25 today.

Advanced Cannabis, which leases space to producers and vendors, has climbed to $7.95 this year from $3.25. The Colorado Springs, Colo.-based company reported a $472,000 loss on $455 in sales in the quarter ending Sept. 30. The shares lost 7.6 percent to $7.35 Thursday.

"We kind of anticipated this happening with the euphoria that happens around the cannabis space with any significant news,'' Frichtel, president and chief executive officer of Advanced Cannabis, said in a telephone interview. "Momentum is just starting to build behind the industry, and I assure we'll do everything right to continue to promote shareholder value.''

GreenGro Technologies has climbed to 80 cents a share from 4 cents at the end of last year. The Anaheim, Calif.-based company reported a net loss of $221,644 during the third quarter. Growlife Inc., which makes indoor growing equipment, has climbed to 35 cents a share from 15 cents in 2013. Tranzbyte, which has a market value of $29 million, has risen to 1 cent from 0.29 cent.

"We appreciate the confidence of investors,'' Marco Hegyi, president of Woodland Hills, Calif.-based Growlife, said in an email. "We are essential to the expansion of the legal cannabis market.''

Medical Marijuana Inc. shares trade at 19 cents, up 21 percent since Dec. 31. Cannabis Science Inc. has more than doubled to 12 cents.

Bruce Campbell, a fund manager with StoneCastle Investment Management Inc., said investors should buy a basket of marijuana companies, instead of trying to pick a winner out of a group of small, thinly-traded stocks.

"You want to do it with a basket, knowing a couple of them will blow up and do really well, with the rest somewhere in the middle,'' said Campbell, who helps manage about C$100 million ($92.4 million) with the firm. "Your basket will probably give you some good returns over the next five to 10 years.''
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Title Annotation:Business
Author:Taborek, Callie Bost & Nikolaj Gammeltoft Nick
Publication:Telegram & Gazette (Worcester, MA)
Geographic Code:1U8CO
Date:Jan 10, 2014
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