What goes together better than video games and weed? After a wild ride with GameStop, day traders on Reddit forum WallStreetBets turned their focus to cannabis stocks this week.
In a matter of days, the stock prices of Canadian cannabis producers listed in the U.S. shot up by hundreds of percentage points—market movements fueled by social media hype and hope that the Biden Administration will legalize marijuana. Yet, a steep reversal came Thursday as traders cashed in on gains.
Tilray’s stock price rocketed 120% from Monday to Wednesday and crashed 47% from its mid-week high to end of trading on Thursday. Tilray, which trades on the Nasdaq and recently struck a deal to distribute medical cannabis products to the U.K., is still up 290% for the year despite reporting more than $250 million in losses in 2020.
Sundial Growers, another Canadian cannabis company listed on the Nasdaq, saw its price jump more than 200% from Monday to Thursday, but was down 40% at market close Thursday.
Other Canadian cannabis outfits like Cronos, Aurora and Canopy saw their stock prices swell and then crash by more than 20% this week.
Todd Harrison, founding partner and chief investment officer of CB1 Capital, a cannabis-focused investment fund with about $50 million in assets under management, is happy to see a flurry of new cannabis investors, but he believes traders on WallStreetBets picked the wrong stocks.
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“I think people are excited about cannabis, but they’re barking up the wrong tree,” says Harrison, who’s invested heavily in U.S. operators.
While traders on WallStreetBets banded together last month to drive up the price of GameStop more than 4,000% to squeeze hedge funds like Melvin Capital holding big short positions, the tone and tenor on the Reddit form this time is markedly different. Certainly, many commenters were in it together to boost the likes of Tilray and Sundial, two companies that have never reported a profit, in hopes the price would go to the “moon.” But other traders seemed to shun the community vibes and only be there to make a buck and pass the bag to the next investor.
“We’re not in this together, I literally handed one of you a bag to hold this morning,” a commenter who goes by OhSoRefreshing wrote Thursday. “These prices are insanely high for these companies. The multiples are out of control, and if you buy in at these levels, well, best of luck.”
While there are good reasons to be excited about cannabis companies, particularly those in the U.S.—15 U.S. states have legalized adult-use sales and Congress is motivated to legalize cannabis federally under the Biden Administration—most Canadian companies won’t benefit as much from U.S. legalization compared with their American counterparts.
Last year, Cowen analysts downgraded Sundial, Tilray, Aurora from “out perform” to “market perform” based on a few factors, including a 32% decrease in Canada’s total addressable marijuana market. “We grow increasingly cautious on the outlook for cannabis in Canada,” the Cowen note read. “More broadly, we prefer U.S. cannabis names to its Canadian peers….”
Cannabis is still illegal under federal law in the U.S. but legal in Canada. This dichotomy means that for the time being, only Canadian operators can list on U.S. exchanges like the Nasdaq and New York Stock Exchange. U.S. cannabis operators, which operate legally under state laws, can list on Canadian exchanges. This means the U.S. operators, like Curaleaf, Green Thumb Industries and Cresco, are not as accessible to investors—Canadian companies like Tilray and Sundial can be traded on Robinhood, while U.S. companies are not.
This is not the first time Canadian cannabis stocks have gone through a boom and bust. The last peak for Canadian cannabis companies ended in 2018 and a bear market took over until the end of 2020. The bust was for good reason—after the hype of national legalization sparked a rally, reality set in. Canada has a small cannabis market, especially compared with the U.S.
“I’ve seen people lose millions and millions of dollars in these stocks before,” says Emily Paxhia, who cofounded a San Francisco-based $150 million cannabis firm. “It’s like watching a bad movie I didn’t want to see a second time.”
To Paxhia, investors in Canadian companies are “directing capital back into black holes,” she says. Companies in the Great White North do not have long-term value compared to U.S. counterparts, she says.
On Wednesday, Sundial, which reported a $271 million net loss in 2019 and $175 million net loss in the 10 months ending in September 2020, was one of the most talked about cannabis stocks on Reddit.
One Redditor suggested the best way to view the hype around a certain stock is as a suggestion of which stocks to avoid. “Actually, a good way to invest is see which stocks are being mentioned the most and then don’t buy those,” CourteousComment wrote.
Jason Wild, who runs a couple funds with about $2.3 billion in assets under management composed of mostly cannabis investments, believes that when the U.S. legalizes cannabis the Canadian companies will be operating at a disadvantage.
“I’d rather be in the U.S. than locked out of the U.S., which is how all the Canadian companies listed on the Nasdaq and the New York Stock Exchange are set up,” says Wild, who’s investments include mostly U.S. operators like TerrAscend, Green Thumb Industries, Curaleaf, Cresco, Trulieve.
Wild says the U.S. operators also have solid financials—many of them have already turned their first profits, making them the better long-term investments.
“The opportunity is to be able to play this great American growth story, which is happening right before our eyes,” says Wild. “We know that there’s a massive cannabis economy and massive demand that’s existed for hundreds of years—all we have to do is move the illicit market to the legal market.”
Harrison of CB1 agrees that right now is a uniquely good time to invest in cannabis. “This is a generational opportunity—we can live 50 lives and never be as lucky as we are now in terms of timing,” he says. “The year 2020 will be remembered as when cannabis took root in the U.S., 2021 will be remembered as the emersion of U.S. cannabis as an asset class and an economic driver.”