I have bought a very speculative penny stock in what has been one of the worst sectors in the entire stock market. In fact many of the popular stocks in this sector are likely to go bankrupt and vanish in the next twenty-four months, because their balance sheets are ticking time bombs.
It’s been a total disaster for people in these stocks and generally speaking you DO NOT want to buy stocks in a bad sector and this sector has been among the worst performing sectors of the entire stock market in the past twelve months.
This makes buying stocks in the sector very risky and yet I bought one in it that is a penny stock that up to this moment has had no revenue.
Can you guess the sector?
If you guessed dope stocks then you guessed right.
Now let me tell you why.
And what is funny is that this is the first time I have ever bought a dope stock. Last year in fact I warned that as a whole they were going into decline and in July I put a sell on Aurora Cannabis (NYSE: ACB) and in December warned that it was heading for a complete selling climax.
The shares of ACB fell 64% last year and the company is racking up mega losses instead of what people thought would be profits following the legalization of cannabis sales in Canada.
But I believe the stock and the sector as a whole is now set for a “January effect” rebound. This is a trend in which the worst stocks of the market experience heavy tax loss selling going into the end of the year and even more selling as money managers take them off of their books in shame. Once that selling is exhausted though that typically leads to a rally in January.
That now seems to be starting for the sector. Take a look for example at the sector exchange traded fund Alternative Harvest ETF (NYSEARCA: MJ).
As you can see the MJ ETF built a base from November to mid-January over the course of eight weeks. Last week it finally launched a rally to push it to a close above its 50-day moving average for the first time since last March.
That’s a key move and suggests that a rally in the sector is now on for the next few weeks and perhaps even the next few months. This will help stocks like ACB. Another stock lined up are shares for Tilray, Inc. (NASDAQ: TLRY).
TLRY has a very similar chart to MJ. It had a big rebound move up last week from $15 to over $20 per share. If it can pause here and consolidate it would make a good entry point for another rally. We’ll see what happens.
I think the stocks that will go up the most though are new stocks in the sector that are just starting out and therefore don’t only have the big overhang of losers in the stock, but actually have more potential to grow revenue and earnings going forward now.
I simply don’t like to buy stocks of companies with massive debts that aren’t making a profit as they often go bankrupt. And this sector is full of such tragic stocks. So it is the new companies that are more interesting to me.
What I bought this month were shares in Mota Ventures (CNSX: MOTA). It’s main listing is on the Canadian CNSX where it has been doing an average of 591,000 shares of volume in the past 30-days. It’s dual listing on the US OTC has been doing an average of only 1,313 shares of volume a day. That’s where I bought it and to get the right price you just factor in the currency exchange rate when you trade it on the OTC.
Here is the chart for MOTA.
Shares of Mota started to trade in Canada in early December and have been trading in a range with resistance at 70 cents and support around 50 cents. I believe if the stock closes above 70 cents that it is likely to begin a big run that would last for weeks.
Now Mota Ventures (OTCMKTS: PEMTF) has roughly what is only a $11 USD million dollar market cap and that means that it is a speculative stock. It is essentially a start-up company. That’s why it just started to trade in early December. One good thing about that is that it means there aren’t as many losers in this stock as in most stocks in this sector.
It has began a series of big transactions in its space. Last week it announced the acquisition of European CBD company Sativida.
It also announced the completion of the earlier announced acquisition of Wisconsin based First Class CBD, which operates an online retail business selling a range of products, which include CBD oil drops, CBD gummies, CBD pain relief cream and CBD skin serum.
Personally I have no interest in using these types of products and don’t want to even get near them! What is interesting though are two things for me. First of all First Class CBD is turning a profit margin of around 14% on what is $2.7 million in revenue according to the Mota press release on the deal.
And secondly, in order to do the deal Mota issued details that shows a much greater value than its current trading stock price and market cap for this combination:
“Total consideration for the Transaction is US$32,000,000, of which US$1,500,000 was paid upon completion of the Transaction, US$1,500,000 is due and owing within six months, and the balance will be satisfied through the issuance of 47,125,000 common shares of the Company at an effective price of C$0.80 per share. Unified will also be paid a bonus of US$5,000,000 in shares at each level, if First Class reports gross revenues of $42,000,000, $52,000,000 and $62,000,000 in 2020. Share consideration to Unified will be subject to a thirty-six month pooling agreement, as well as a clawback right which allows Mota to retrieve a portion of the consideration paid to Unified if certain revenue levels are not met in 2020,” says the press release about the deal.
So this one single deal values Mota stock at 80 cents CAD when it closed Friday at 65 cents CAD and justifies a $32 million US market cap for the shares on this deal alone when they still only have an $11 million market cap. And it is working on an 80,000 square feet growing facility in Columbia on top of these two deals.
Yes, it is true that dope stocks have been a disaster and speculative stocks are high risk, but I think Mota is a way to actually get in early on a stock in a sector poised for at least an oversold rally that should last at least for a few weeks at what is a price discount.
Disclosure: Mike Swanson owns a position in Mota Ventures. Because it is a small cap stock with less than $100 million in market he is placing himself on a voluntary 30-day trading restriction period from the date of this post in which he will not buy or sell shares of it.