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Penny stocks: is this CBD stock one to buy or avoid?

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There are now a few CBD penny stocks on the FTSE index. Is Zoetic International (LSE:ZOE) one to buy or avoid for my portfolio?

Riding the CBD wave

According to the Centre for Medicinal Cannabis (CMC), six million people in the UK have tried CBD. Unlike the illegal form of marijuana, it doesn’t contain tetrahydrocannabinol (THC) – that’s the part responsible for the ‘high’ from the plant. CBD is marketed as having health and wellness benefits.

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Zoetic describes itself as a premium CBD company. It creates, markets, and sells CBD-based products such as oils, soft gels, and cosmetic products. Its most successful product is an alternative tobacco brand called Chill, which is making huge strides in the US market. Zoetic recently signed a landmark deal with the Asian America Trade Association, which represents convenience stores based in the US, for promoting its Chill brand.

Among the CBD penny stocks out there, I am reviewing Zoetic due to its position in the market and achievements. It has won multiple awards for its products and is recognised worldwide for its product quality.

Share price and performance

As I write, Zoetic shares are trading for 51p per share. In the past 12 months, its share price has increased by over 500%. This time last year shares were trading for 8p per share.

I believe the rise in share price has been triggered by Zoetic’s alternative tobacco brand Chill. In a trading update in October 2020, Zoetic announced successful trials of Chill products prompting a share price rise.

In its most recent trading update in April, it confirmed by July 2021 Chill products will be on sale in 3,500 stores. Additionally, Chill branded products will be entering the UK market for the first time and being made available to consumers. Furthermore, new products such as anti-ageing creams and other innovations were in the pipeline as well as new distribution deals internationally. It all sounds really promising but what is actually selling? Well, it seems not a lot just yet.

Should I invest in CBD penny stocks?

I admit as a penny stock Zoetic seems to be doing the right things from a product perspective. There are promising signs. But, there are lots of risks. Firstly, Zoetic only moved towards being a wholly CBD focussed firm in 2019. Prior to that, it was an oil and gas business called Highlands Natural Resources. This resulted in a loss of a revenue stream and therefore financials have not been the most impressive to date. For example, between April and September last year, only £55,000 worth of goods were sold.

Next, Zoetic has had to use credit facilities to keep the lights on in the past. It opened a credit facility worth £35m with LDA Capital but has since managed to cancel this due an uptake in subscriptions and growth.

Finally, the overall promotion and medical cannabis market has been hampered by the lack of clinical evidence showing its effectiveness in treating various conditions. This will cause volatility in the market and performance of any stock, especially a penny stock, so this is a big risk.

Investing in CBD penny stocks is not for me. I would not invest in Zoetic today as I feel it is too risky and perhaps too early. Having promising products does not pay the bills, sales do and currently Zoetic is unprofitable. I will keep an eye on developments, however.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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