Reddit traders are piling into cannabis stocks and driving up valuations, but experts say they're betting on the wrong companies

  • Online chatter in the Reddit forum WallStreetBets has turned to pot stocks like Tilray, Aphria, and Sundial.
  • Cannabis stocks have soared, buoyed by Biden’s victory and Democrats’ plans to federally decriminalize cannabis in the US.
  • But investors say those looking to bet on US legalization are looking in the wrong place: They should be investing in US companies directly.
  • Visit the Business section of Insider for more stories.

The traders who hang out on the Reddit forum WallStreetBets have a new target as GameStop shares fall back to Earth: cannabis.

Canadian cannabis stocks like Tilray and Aphria — which agreed to merge in a $4 billion deal in December — have surged since President Joe Biden took office and top Senate Democrats have said they want to federally decriminalize cannabis.

On Wednesday, Tilray gained 51% and Aphria jumped 11% respectively. Canopy Growth, a Canadian cannabis giant that reported earnings on Tuesday, advanced 6.3%, even though the company lost $829 million in the last quarter. Sundial, a smaller firm that cultivates cannabis, surged 79%.

While experts say it’s difficult to link online chatter directly to major market moves, it’s clear that the WallStreetBets crowd has been focused on cannabis stocks.

On Tuesday evening, Reddit user jcal1920 posted a GIF of his Robinhood account showing that he had made over $500,000 on Aphria and Tilray shares since January 5, along with emojis for trees — meant to signify marijuana — and rocket ships. The post has since received almost 12,000 likes and made it to the Reddit forum’s front page. Other posts touting cannabis stocks have racked up over 40,000 likes within hours of being posted on Wednesday.

Swaggystocks, a website that compiles information from WallStreetBets and other online forums about which stocks users are talking about, found that mentions of Tilray on WallStreetBets are up to 2,600 in the last 24 hours, versus the 7-day average of about 270 mentions. 

“I’ve been putting money into weed for decades. Now I also own stock in it,” Reddit user MermaidFishCo posted, garnering over 11,200 likes on WallStreetBets.

The prospect of US legalization is boosting cannabis stocks

Cannabis company stocks have been gaining since November when Joe Biden’s victory in the presidential election and the success of cannabis-legalization measures in five states gave the industry fresh tailwinds. The victories of both Democratic Senate candidates in Georgia’s January runoff elections, which gave Democrats control of Congress, added fuel to the rally.

Tilray shares have soared close to 500% since the beginning of the year, while Canopy shares have gained over 93% over the same period. One index of cannabis stocks has gained 122% since November after President Biden was elected. 

But investors driving up Canadian cannabis stocks are putting their money in the wrong place.

“Investors are backing a phenomenal theme, the growth of cannabis in the US, but picking the wrong horses,” Sean Stiefel, the CEO of the cannabis hedge fund Navy Capital, told Insider in an email.

Investors should focus on US cannabis stocks, but there are challenges.Samantha Lee/Business Insider

Jeffrey Schultz, a partner at the cannabis law firm Feuerstein Kulick LLP and an active investor in cannabis companies, told Insider that investors would be better off betting on US companies.

“What’s unfortunate is that they’ve completely missed the mark by buying Canadian LPs based on US legalization prospects when they won’t really benefit,” Schultz said.

In Schultz’s view, US cannabis companies, known as multistate operators or MSOs, like Green Thumb Industries and Curaleaf will ultimately benefit from legalization in the US.

But it’s not easy for retail investors to buy US cannabis stocks. Those stocks are listed in Canada and trade over-the-counter in the US because they handle a substance that’s federally illegal. Retail investors can’t buy them on the trading app Robinhood.

Stiefel said that dynamic is creating a “massive air pocket” in the Canadian cannabis stocks. 

Cannabis stocks and meme stocks differ in fundamental ways

Canadian cannabis stocks like Tilray, Aurora Cannabis, and Canopy Growth do have some superficial similarities to stocks like GameStop and AMC that retail traders sent sky-high. Both cannabis firms and those “meme stocks” are easily accessible to retail investors on trading platforms like Robinhood, they’re widely discussed in the media, and are heavily shorted, said Mitch Baruchowitz the managing partner of cannabis investment firm Merida Capital Holdings.

But that’s where the similarities end, he said. Cannabis stocks, whether it’s rational or not, have been on a tear on the promise of US legalization. But the ease with which investors are able to go on Robinhood and buy shares of companies like Tilray is what is driving the rally, rather than investors doing rigorous due diligence and finding the best value, he said.

“We’re in a world where people look for immediate gratification, people want stocks that are easy to play on Robinhood,” Baruchowitz said.

Baruchowitz said he thinks that long-term Canopy Growth investors will view the rally as an opportunity to sell. 

“There are lots of legacy bag holders who are pulling the escape hatch,” Baruchowitz said. “This is a chance of a lifetime for the bag holders. How are you not selling Canopy at $50 a share?”

Canopy shares closed at $52.17 on Wednesday.

“I think a lot of people are going to get hurt again,” Baruchowitz said. 

Stifel analyst Andrew Carter kept his sell rating on Canopy Growth, following the company’s earnings report.

“We believe results fall short of justifying Canopy’s rich valuation with underappreciated challenges remaining,” Carter wrote on Wednesday morning. 

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