There is more to pot stocks than just a Reddit short squeeze of Tilray

Shares of Tilray and other Cannabis stocks were pumped and dumped by Reddit group WallStreetBets. But there is more to weed stocks than WSB.

Key takeaways

  • Cannabis company shares are falling heavily as a Reddit-based short squeeze runs out of juice
  • Pot stocks had jumped yesterday, led by Tilray which rose 50% - cumulating into a 500% year-to-date return
  • Nerves about earnings from Aurora Cannabis added to the decline
  • The Cannabis sector has newfound enthusiasm thanks to the prospect of US Federal legalization and industry M&A / partnership activity
  • Risks include investors getting burnt in another pump and dump as well as well as Biden failing to deliver on new US legislation
  • Cannabis ETFS include: MJ YOLO CNBS & THCX

What’s happening with pot stocks?

Reddit has built up another stock-buying short-squeezing frenzy - this time in Tilray (TLRY), which soared 50% in one day but gave up the gains the day after. 

 

short squeeze-1

 

But there is a bigger picture to both Tilray and the wider Cannabis sector. Year-to-date Tilray stock is up over 500%. Last year Tilray stock began its climb after it announced a merger with rival Aphria and a series of events have built up investor confidence in 2021.

 

tilray chart 2

 

  1. Democrats winning the Senate was a major milestone towards the decriminalisation of marijuana at the Federal level in the United States.
  2. This optimism was confirmed shortly afterwards in a press release from leading Democrats including Senate leader Chuck Schumer that prohibition would end this year (2021).
  3. Pot stocks were already a favourite sector for Reddit traders. Added to this, Tilray is among the most heavily shorted by hedge funds - continuing the GameStop David vs. Goliath narrative from the past fortnight.
  4. The latest news was the partnership between Tilray and Grow Pharma to enable distribution in the UK. This is a big step for the Canadian companies turning their attention overseas toward Europe where many countries are overturning marijuana laws.

Is this just a pump and dump?

Some pumping and dumping is taking place here! The involvement of Reddit means an improving outlook for the industry has turned into a frenzy. We think it is best to split the outlook into two.

 

tilray chart

 

Based on the GameStop experience, the short term rise and fall in the price will last a week but perhaps less now that short-sellers are more attuned to the risk. The bigger picture is more interesting and given how far Cannabis stocks have dropped since the 2018/19 bubble popped. There is more room for catch-up.

The bullish case for Cannabis

We have identified a few areas where Cannabis has long term potential.

US legalisation

Democrats taking control of the Senate significantly improves the chance of new Cannabis legislation in the US. Religious conservatives among Senate Republicans had been the main force behind keeping the failed 'war on drugs' in place while more and more States are legalizing both medicinal and recreational marijuana use.

M&A

Tilray and Aphria is probably the start of  more consolidation among the big players in Canada. If not full-blown M&A then partnerships between the different parts of the industry from growers/distributors to biotech to big consumer brands will enable quicker and more international growth.

Profits

The firms involved in the 2018/19 stock bubble have all been working hard to bring down costs and streamline operations since the bubble popped. The biggest Cannabis company in the world, Canopy Growth says it expects to earn a profit in the second half of 2022.

Risk to Cannabis stocks

The path to widespread acceptance of Cannabis is still a bumpy one, especially in the United States which would be by far the biggest market for Cannabis products and would also set the ball rolling in other parts of the world- including South America.

WallStreetBets

A short term retail mania may delay or event prevent more stable investment into the industry. Big investors will stay away if price multiples remain unattractive because of short-term bubble-like conditions. Still, that hasn’t stopped Tesla (TSLA) !

Biden fumbles

Joe didn’t get marijuana reform done when he was number two under Obama and the risk is we get a repeat. Obama prioritised other issues like healthcare and then Democrats lost the Senate. Biden as well as Congress have to deal with pressing issues like the covid-19 pandemic and the trade war with China, meaning Cannabis reform might not get a look in.

How to play it: diversify

For those investing into Cannabis, the age-old rule applies - diversification. The big Canadian companies have first-mover advantage but picking long term winners in a fast growing industry is always tricky. Fortunately there are a number of funds and ETFs specializing in Cannabis stocks.

 

ETFMG Alternative Harvest ETF (MJ)

The benchmark ETF for the Cannabis industry with highest Assets under management (AUM)

AdvisorShares Pure Cannabis ETF (YOLO)

A favourite among Reddit traders given its ticker (You only live once!)

Amplify Seymour Cannabis ETF (CNBS)

Aims at exposure to the ‘global’ cannabis industry with holdings outside the US Canada

Spinnaker Pure Cannabis ETF (THCX)

A 'pure play' Cannabis ETF focused in both and value companies, mostly in Canada

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