Cannabis stocks plummet as recovery fueled by hopes for US legal reform comes to a halt

Cannabis stocks plummeted on Thursday and many of the best in the industry a day earlier gave up their gains as relentless buying in recent weeks amid growing hopes for reforms of strict US laws came to a halt.

The Cannabis ETF THCX,
it had fallen 18.1% by mid-afternoon, setting it up for its biggest drop in a day since going public in July 2019. The previous record sell-off was a 14% loss on March 12, 2020.

Tilray Inc. TLRY,
down 40%. The stock had gained 50.9% the day before, the biggest one-day gain since rising 56.8% on March 26, 2020, to close Wednesday at a nearly two-year high of $ 63.91. . The stock had soared 148.5% amid a three-day winning streak, before Thursday’s pullback. Aphria Inc. APHA,

with which it merges, fell by 28%.

“Things had gotten too early,” said Korey Bauer, chief investment officer and portfolio manager for Foothill Capital Management’s Cannabis Growth Fund.

While some of the recent purchases appeared to be driven by a group of investors on Reddit that had sent shares of video game retailer GameStop Inc. to record highs in recent weeks, “we’ve also had record flows in exchange traded funds and mutual funds in the last few weeks, ”Bauer said.

“There has been a massive movement and most of the people are buying Canadian cannabis stocks, which will not be the direct beneficiaries of any law reform in the United States. It has been quite tough on these movements,” he said.

The rally kicked off with the election of President Joe Biden and Vice President Kamala Harris, who are seen in favor of reforming the strict US federal cannabis laws, which, despite the progress made by medical marijuana advocates , they continue to classify it. as a Schedule I drug, along with heroin.

That has hampered the development of the legal market, which is limited to those states that have legalized cannabis for medical or recreational use, and has kept companies largely out of the federally insured banking system.

With more states voting to legalize on the November ballot, and New York is expected to join this year and create a market to rival California’s, investors are looking at the sector with renewed interest.

“There is cause for optimism, and clearly these micro and macro factors, combined with reasonable valuations, have caught the attention of many investors,” said Jason Wilson, banking and cannabis expert at ETFMG, the issuer of MJ ETF MJ.
“But while the cannabis industry is clearly growing globally, and many cannabis companies are on the way to profitability, the recent rally in cannabis stock prices appears to be becoming too exuberant.”

Even amid Thursday’s 40% drop, Tilray, for example, is still up 129% over the past 12 months, despite its continued losses and its struggle to increase revenue.

Tilray is the shortest stock in the cannabis sector, with short interest accounting for 23.1% of the public listing as of Wednesday, according to S3 Partners LLC. But despite this great short position, the recent rally was not the result of a small contraction.

Data: The shortest stocks in the US at the end of January

Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3, said the bearish bets on Tilray have increased this year. The stock’s short value was $ 1.33 billion, more than $ 1 billion since the company announced its merger with Aphria in December.

Despite the advantage Canadian companies enjoy in cannabis (Canada fully legalized the plant for recreational use for adults in October 2018), companies have struggled to achieve profitability as the launch delayed expectations and red tape. hindered the opening of retail stores. That allowed the black market to prosper and compete with the legal sector, where prices are higher.

“There is a huge oversupply in Canada and definitely some risk in Canadian names,” Bauer said. “We continue to think that some of the multi-state traders in the US are attractive, but because they are not listed on the major exchanges, there is a disconnect between the US and Canadian valuations.”

Due to federal prohibition, American cannabis companies trade over the counter or on Canadian bags, although there is growing optimism that it will soon change.

Senate Majority Leader Chuck Schumer and two of his fellow Democrats have pledged to bring cannabis legislation to the current Congress. That has raised hopes for at least one safe harbor banking language, which would give companies access to banks and open up capital markets.

Read now: Cannabis Stocks Rebound After Chuck Schumer Leads Campaign for Reforms That May End Federal Ban

“Anything that allows American companies to get on the list would be extremely beneficial,” Bauer said.

Meanwhile, investors should fasten their seat belts.

“Given the strong price gains in recent days, I would expect to see volatility in cannabis stock prices as we start to see downward pressure related to profit taking and potential short selling,” said Wilson. .

Smoke Wallin, CEO of Vertical Wellness, a maker of CBD-based wellness products, agreed, but said individual investors entering the space right now are making the right move in anticipation of an avalanche of institutional money. once the rules are relaxed.

“That is not to say that any individual trading of stocks up and down makes sense at today’s valuations,” he said. “But any holder who believes that the fundamental shift to a broad-based national legal cannabis market will be highly rewarded.”

With a large number of private companies preparing to enter the market in the next 12 to 18 months, there will be more acquisition targets, he said.

“So there will be a lot of mergers and acquisitions in the next 12 months, there will be a lot of capital coming in, and I think individual tickers will go up and down, with volatility,” Wallin said.


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