View: This marijuana stock is 900% higher and still smoking - Due Diligence...

By Philip van Doorn, MarketWatch

A quick look at two of this year’s hottest stocks shows that investors chasing fads could take quite a beating if they aren’t careful.

Bubble, Bubble Bubble. Does that look or sound familiar? At this point in a five-year bull run, it’s no surprise to see a continual stream of articles warning of a coming market “correction.” Isn’t that a strange term for a market decline? A healthy stock market is usually at or near a record level, because it is the nature of market economies to expand and for prices to inflate.

Consider the dire warnings of a 20% correction. That would follow a 6% year-to-date rise for the S&P 1500 Composite index, after a 30% increase in 2013 and a 12% gain in 2012. For investors with very long horizons, including those making regular contributions to 401(k) or other tax-deferred retirement accounts, the correction wouldn’t be such a bad thing, since subsequent contributions would buy in at lower prices.

But you’ve heard that argument before.

Here’s something else to consider: The largest U.S. companies are trading at considerably lower valuations, on average, than smaller ones. The large-cap S&P 500 Index /quotes/zigman/3870025/realtime SPX +0.36%    trades for 14.8 times aggregate consensus 2015 earnings estimates, according to FactSet. Meanwhile, the S&P Midcap 400 Index /quotes/zigman/6015543/realtime MID +0.12%    trades for 16 times forward EPS estimates and the S&P Small Cap 600 Index /quotes/zigman/3870020/realtime SML +0.19%   trades for 16.2 times forward estimates.

There are winners and losers in any market. But among the most speculative of small-cap stocks, everybody’s favorite punching bag is Cynk Technology Corp. /quotes/zigman/32530648/delayed/quotes/nls/cynk CYNK +26.67% , which is headquartered in Las Vegas, and describes itself as a “development stage company which focuses on a social network.” Cynk also says it “intends to serve seekers, who want to meet people; mavens, who know a lot of people; and targets, who are people that other people want to meet.”

Isn’t that nice? Cynk is a wonderful stock. Since the company reports no assets or revenue, there’s very little for investors or analysts to worry about. Then again, there’s nothing at all to support any stock price, save the above word games. The problem is that’s pretty much all Cynk has to say about anything.

Cynk was founded in 2008, but has never commenced operations. The stock this year traded for 10 cents or less through June 16, after which it began a 17-session ride up to a closing price of $13.90 on July 10, for a year-to-date gain of 13,800%. Trading was then halted by the Securities and Exchange Commission, and when it resumed last Friday, the stock sank 85% to $2.10. Then on Monday it dropped another 71% to 60 cents. That was followed by a 33% decline on Tuesday to 40 cents.

There’s a point to all this, which is that you shouldn’t buy stock in any company if you’re unwilling to look at its financial statements. It’s not as difficult as it sounds to pull up quarterly or annual reports, look for trends and read management’s comments.

A ‘real’ hot small-cap stock

Among small-cap U.S. companies valued at between $50 million and $2.5 billion that have been publicly listed at least since the end of last year, the strongest performer has been Cannabis Sativa Inc. /quotes/zigman/24849596/delayed/quotes/nls/cbds CBDS -1.21%  of Salt Lake City, which is up 900% year-to-date through Tuesday’s close at $7.50.

And unlike Cynk, Cannabis Sativa is a real company that produces and sells products and regularly files financial statements.

As its name implies, Cannabis Sativa is in the business of “developing, manufacturing, and selling plant-derived lotions, creams, and other formulations for human consumption.” These include herbal compounds. The current line of products, many of which are derived from marijuana, are marketed through Wild Earth Naturals , which Cannabis Sativa acquired last year.

Former New Mexico governor and U.S. presidential candidate Gary Johnson was appointed CEO of the company on July 7, and has long touted the benefits of hemp oil as part of treatments to help with a variety of illnesses and conditions.

On July 1, Cannabis Sativa completed its acquisition of Kush Inc., which is a “development stage” company seeking to obtain a patent on a hybrid medicinal strain of cannabis called “CTA,” described by former Kush CEO and current Cannabis Sativa chairman Steve Kubby as “extremely potent.”

Kubby said in the press release announcing the January agreement that “the more [CTA] you smoke, the higher you get, right up to psychedelic levels.”

So despite Cannabis Sativa’s current focus on products meant to improve health, the company is looking to score big by distributing recreational marijuana products in the only two states where it is currently legal to do so.