A worker inspects cannabis plants inside the grow room at the Aphria Inc. Diamond facility in Leamington, Ontario, Canada, on Wednesday, January 13, 2021. Tilray Inc. and Aphria Inc. have agreed to combine their operations, forming a new giant in the fast-growing cannabis industry.
Annie Sakkab | Bloomberg | fake images
Shares of a handful of cannabis stocks are on the rise Wednesday, the new set of goals from Reddit’s trading community that is betting on federal legalization of the plant under the new Democratic administration.
Tilray shares were up about 25% on Wednesday, bringing the stock’s annual profit to more than 530%. Canopy growth is up 4%, adding to its 100% rally in 2021. Aphria is also up 10% on Wednesday, adding to its 275% increase this year. Aurora Cannabis is up 11%, bringing its annual profit to date to over 100%.
The group of cannabis companies is attracting the attention of the same WallStreetBets Reddit army that contributed to the epic short squeeze on GameStop last month. Several posts on the social media forum show users expressing optimism about the upside in stocks.
“The $ TLRY $ APHA calls from Jan 5, 2021 brought me over $ 500k today. I still think it has a lot of advantages,” said a Reddit post.
“Weed is about to become a millionaire in 2021,” read another post, with over 107,000 likes.
“We think the rally in Canadian names is primarily driven by retail investors, perhaps driven by Robinhood and Reddit, which is really piling up on Canadian cannabis names in particular,” Pablo Zuanic, an analyst at Cantor Fitzgerald, told CNBC. “I’m not going to say it’s a GameStop type case, but the Canadian rally is not entirely based on fundamentals. But when we talk to customers, we tell them to be careful trying to shorten these Canadian names because you know what happened to GameStop. in the Lead. “
The movement in marijuana stocks could also be related to high short interest rates, which measure how many of the company’s traded shares are being used in bets against the company. GameStop and AMC Entertainment were targeted by retailers in part because their high short interest made the stocks attractive candidates for the so-called short contraction. Tilray’s short interest equals 22.5% of the shares available for trading, according to FactSet. The official short interest data is current as of January 29.
“The feedback is that some of the forums are putting the big prominent names in their reach,” W. Andrew Carter, an analyst at Stifel, told CNBC. It has a sales rating on Canopy Growth and Aurora. Stifel has a retention rating above Aphria and Tilray.
“Most of the short positions have gone home during the year, so the relaxation is not as much of a tailwind as it was for the initial price action – actually, it is so much buying and not much resistance,” said the analyst. “It is very difficult to justify where these stocks are trading right now.”
While Reddit traders are seemingly bullish on the names, Wall Street has a different tune. Of the 14 analysts that cover Tilray, only two have a buy rating on the stock, according to FactSet. Of the 20 analysts who cover Canopy Growth, only two recommend buying the shares and of the 11 analysts who cover Aphria, seven have a buy rating.
“This is totally in the script of the anti-establishment movement on WSB and Reddit. They are feeling their crowdfunding oatmeal and are now targeting any social disruption they may cause,” Tim Welsh, founder and CEO of the wealth management consultancy. Nexus Strategy, he told CNBC. “And there is no better historical symbol to amplify personal freedom and revolution than marijuana.”
Part of the discussion on Reddit has centered on the pending merger between Tilray and Aphria. According to a December press release, Aphria shareholders will receive approximately 0.84 Tilray shares for one Aphria share when the deal closes.
Goldman Sachs US equity strategist David Kostin said on “Squawk on the Street” that gains from Reddit’s popular stocks were related to a strong start to the year for small-cap companies and a continued rise in new special purpose acquisition companies.
“The pockets of glut, so to speak, or momentum or foam, definitely exist in some sectors … but at the end of the day, the rates are very low,” Kostin said.
The Democrats’ push for marijuana
Cannabis companies have also received a boost from the intentions of the Democratic Party, which now has the White House and a majority in Congress, to legalize the plant at the federal level.
Canaccord Genuity analyst Matt Bottomley downgraded Canopy Growth to sell from hold on Wednesday, saying the Canadian company’s share price had risen too high due to the legalization outlook in the US.
“Although we believe that it is possible that Cdn LPs will eventually secure exposure to THC in the US, we do not anticipate federal legalization of cannabis in the US in the short term and we believe that the appreciation of the value of CGC in lately you probably won’t find the corresponding fundamental upside at this point, “Bottomley said in a note.
Tilray is no stranger to the brief squeeze that occurred at GameStop and AMC last month. In 2018, shortly after it went public, the Canadian marijuana producer’s shares were caught in a savage little pressure and rose about 1,400% between July and September of that year on an intraday basis.
Tilray CEO Brendan Kennedy told CNBC during the GameStop drama that he was experiencing post-traumatic stress disorder from his own little squeeze years earlier.
“I remember getting five different calls from Nasdaq in a single day about our stocks shutting down because the short sellers were under so much pressure,” Kennedy told CNBC’s “Squawk on the Street.” “My advice to those CEOs would be that, at times like this, your company is not your stock and your stock is not your company.”
– with information from CNBC’s Kevin Stankiewicz.
Subscribe to CNBC PRO for exclusive insights, analytics, and live business day programming from around the world.