Shares of thinly-traded and volatile marijuana stocks like Medbox (MDBX) enjoyed a big bounce on Thursday following the dawn of legalized recreational pot use in Colorado this week.
The rally marks the latest double-digit move for these stocks, many of which have tiny market capitalizations and small float sizes, making them riskier than more well established stocks for retail investors.
Medbox, which makes marijuana dispenser machines, was recently trading up 57.01% at $28.67. The volatile stock traded as low as $10.00 just last week.
The rally comes a day after Colorado’s new recreational marijuana laws went into effect, making the Centennial State the first to legalize cannabis use recreationally. Marijuana is already legal for medical use in 21 states plus Washington, D.C.
But retail investors should be careful to conduct their own due diligence on these stocks given that they aren’t widely held and are at risk of seeing wild price fluctuations. Only GrowLife and Medbox have market capitalizations above $100 million and Tranzbyte’s market cap is just $7 million.
“Realize these companies have not been very well vetted. They are open to manipulation. This is a classic example of something that people think is cool or a trend. That’s not a good investment thesis,” said Michael Block, chief strategist at Rhino Trading Partners.
Block noted that even if there is a fundamental reason to bet on pot stocks such as increased chances of widespread marijuana legalization, it may be tough to tell which company or companies will be the ones to benefit. In that scenario, marijuana stocks might also face competition from cash-rich traditional tobacco companies like Altria (MO), he said.
“It’s like the greater fool theory. If you can’t figure out who the rube is, you’re the rube,” said Block.
In November 2012, Medbox took the unusual step of releasing a statement to call into question its own share price, which had surged more than 3,000% after being mentioned in a MarketWatch story.
At the time, Medbox CEO Bruce Bedrick said the company wants to “temper investor expectations at present price points” and chalked up the rally to a lack of a large float. Medbox’s shares plummeted about 90% the following day.