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Several cannabis growers rallied sharply on Wednesday. This industry is a new target for the stock market retailer community from the popular Reddit forum. They are betting on federal legalization of cannabis in the United States under the new Democratic administration.
Tilray shares soared 50%, bringing the stock to over 670% YTD. Canopy Growth is up 6%, adding that result to a 110% rally in 2021. Aphria is up 10% from its 280% gain this year. Aurora Cannabis is up 20%, bringing the stock to more than 120% year-to-date.
The cannabis group of companies is grabbing the attention of the close-knit community of WallStreetBets on Reddit, which fueled GameStop’s epic push last month. Some forum posts indicate that users are optimistic about the rise in stocks.
«Calls $ TLRY and $ APHA from 05/01/2021 brought me over 500 thousand dollars today. I still think they have many advantages», – says one of the posts on Reddit.
«Weeds are going to make me a millionaire in 2021», – said in another post with over 107k likes.
«We believe that the rise in popularity of Canadian companies is driven mainly by retail investors, perhaps thanks to Robinhood and Reddit, which is indeed affecting Canadian cannabis brands, CNBC told CNBC. Pablo zuanik, analyst at Cantor Fitzgerald. “I’m not going to say this is a GameStop type of case, but the rally in Canada is not entirely based on fundamental principles. When we talk to clients, we advise them to carefully downsize positions at these Canadian companies because you know what happened to GameStop on the road to success.».
The move in stocks can also be associated with high shorts, which measure how many stocks are used to bet against the company. GameStop and AMC Entertainment targeted retail traders in part because their high short interest made the stock attractive for a so-called short squeeze. According to FactSet, Tilray’s short interest is equal to 22.5% of the shares available for trading. Official data on short-term interests is current as of January 29.
«Reviews suggest that some of the forums include big names», – told CNBC W. Andrew Carter, Stifel analyst. It has a top selling rating on Canopy Growth and Aurora. Stifel has retention ratings on Aphria and Tilray.
«The shorts are mostly gone within a year, so the unwinding is not so much a tailwind as it was for early price action, it is just really an increase in buying and a factor of little resistance, the analyst said. – It is very difficult to justify where these shares are currently traded».
While traders on Reddit seem to be optimistic about individual companies, Wall Street has a different mindset. Of the 14 analysts covering Tilray, only two have buy ratings for the stock, according to FactSet. Out of 20 analysts covering Canopy Growth, only two recommend buying the stock, and out of 11 analysts covering Aphria, only seven have a buy rating..
«This is perfectly in line with the anti-establishment movement scenario on WSB and Reddit. They feel their crowdfunding is a weapon and are now targeting any social upheaval they may cause, CNBC told CNBC Tim Welch, founder and CEO of Nexus Strategy consulting firm. – And there is no better historical symbol to enhance personal freedom and revolution than stock trading».
Some of the discussion on Reddit has centered around the upcoming merger of Tilray and Aphria. According to the December press release, Aphria shareholders should receive approximately 0.84 Tilray shares per Aphria share after the close of the deal..
Chief Stock Strategist, Goldman Sachs in the United States David Costin said on CNBC that the rise in popular shares on Reddit was associated with a good start to the year for small-cap companies and continued growth in the number of new special-purpose acquirers.
«Areas of excess, if you will, buoyancy or foam certainly exist in some sectors … but at the end of the day, the rates are super low», – said Kostin.
Cannabis companies have also received support from the Democratic Party, which now occupies the White House and won a majority in Congress. Democrats promise to legalize cannabis at the federal level.
Analyst at Canaccord Genuity Matt bottomomley on Wednesday downgraded Canopy Growth from hold to sell, saying the Canadian company’s share price had risen too much given the US legalization situation.
«While we believe that Cdn LP may ultimately provide access to THC in the US, we do not anticipate federal legalization of cannabis in the US anytime soon and believe that the recent rise in the value of CGC is likely not to meet corresponding fundamental growth potential.», – noted Bottomley in a policy note.
Tilray has already gone through a short-term compression phase similar to the GameStop and AMC cases last month. In 2018, shortly after going public, shares of the Canadian marijuana grower were trapped in a short-lived deficit and surged about 1400% between July and September of the same year based on intraday trading..
CEO of Tilray Brendan kennedy told CNBC that he suffered from PTSD due to stress received many years ago.
«I remember in one day I received five different calls from Nasdaq that our stock was stopped due to the fact that sellers were tightly short, ”Kennedy told CNBC. – At such moments, I would advise CEOs to tell themselves that your company is not your shares, and your shares are not your company».