WallStreetBets Reddit Army Hands Busy with Cannabis Stocks

On Wednesday and Thursday, the shares of mostly Canadian cannabis stocks like Tilray, Canopy Growth, Aurora Cannabis, and Aphria soared. Reddit is to “blame” for orchestrating the cannabis stocks earthquake. Tilray’s shares have gained by as much as 50%. 

The same Reddit crowd that helped almost quadruple the stock price of the struggling video game retailer GameStop (GME) last month has now shifted attention to cannabis stocks.  Some of the Reddit discussions focused on the pending merger between Tilray and Aphria. Simultaneously, the Democratic Party’s intentions to legalize marijuana federally have also watered growth. The shares of the Canadian cannabis stocks first surged Wednesday (Feb. 10), then continued soaring again on Thursday (Feb. 11) as the Reddit amateur investors circle went on betting on the plant's federal legalization under the new Democratic administration. 

Shares of Tilray, a pharmaceutical and cannabis company soared 50%, bringing the stock’s year-to-date gain to over 670%.  Ontario-based Canopy Growth popped 6%, adding to its 110% rally in 2021. Aphria, also from Ontario, rose 10%, adding to its 280% gain this year.  Edmonton-based Aurora Cannabis, who only recently nerved investors with a 12,200% gain no shareholder asked for, got a 20% boost, which brought its year-to-date rise to more than 120%. The batch of cannabis companies got the attention from the same trade community on the WallStreetBets Reddit channel that contributed to GameStop's rise from the death last month. “We are going *higher* than the moon,” one Reddit post with 63+k upvotes reads. “+1100% on TLRY calls. I used to be retarded but now I’m retarded and able to pay off my car loan,” reads another, which has 17.4+k upvotes. “Weed about to make me a millionaire in 2021,” a third user said.

Expert analyst at Cantor Fitzgerald, Pablo Zuanic, told CNBC they believed retail investors mostly drove the rally in Canadian names, "maybe fueled by Robinhood and Reddit, that's really piling into the Canadian cannabis names in particular." "I'm not going to say it's a GameStop type of case, but the Canadian rally is not entirely based on fundamentals," Zuanic said. "When we talk to clients, we tell them careful trying to short these Canadian names because you know what happened with GameStop on the way up," he said. Tim Welsh, founder and CEO of wealth management consulting firm Nexus Strategy, told CNBC, "this is totally on script for the anti-establishment movement on WSB and Reddit." "They are feeling their crowd-funding oats and are now aiming it at whatever social disruption they can cause," Welsh said. "And no better historical symbol to amplify personal freedom and revolution than pot." The latest development could also relate to high short interest ratios, which measure how much of a company's traded shares are being used in bets against the company, CNBC reports.

Retail traders partly targeted players like GameStop due to their high short interest making their stocks attractive for a so-called short squeeze. Enter Tilray, its short interest was equal to 22.5% of its available for trading shares at the end of January. The company is also already familiar with the kind of short squeeze that occurred to GameStop and AMC Entertainment last month. When Tilray went public in 2018, the weed manufacturer's stock was tangled in a volatile short squeeze and went up about 1,400% between the summer months of that year on an intraday basis. “I remember getting five different calls from Nasdaq in a single day about our stock being halted because the short sellers were being squeezed so badly,” Tilray CEO Brendan Kennedy told the Squawk on the Street chat show back in January. Kennedy also said he was experiencing

PTSD from his wild experience. While the Reddit traders are seemingly bullish on the names, Wall Street rings in differently. According to FactSet, of the 14 analysts who cover Tilray, only two have a buy rating on the stock. Of the 20 analysts who cover Canopy Growth, only two recommend buying the name, and of the 11 analysts who cover Aphria, seven have a buy rating. “The shorts have mostly gone home for the year so the unwinding isn’t as much of a tailwind as it was for the early price action, it just really is just that much buying and not much resistance,” W. Andrew Carter, an analyst at Stifel, who has a sell rating on Canopy Growth and Aurora, told CNBC. “It’s very difficult to justify where these stocks are trading right now,” Carter said. Stifel also has a hold rating on Aphraia and Tilray.

Activities of the U.S. Democratic Party are likely to fuel any ongoing cannabis stocks action as well. Democrats now hold a Congress majority and also the White House. Legalizing marijuana on the federal level is on their schedule, although onlookers are more convinced legalization will happen later rather than sooner. The Canadian company's stock price had run up too far given the legalization landscape in the U.S., where domestic stocks have been steadily gaining since President Joe Biden assumed control of the White House following the November election. Federal legalization of cannabis in the U.S. is headed to burst the prices of cannabis to drop and automatically ramp up competitiveness. Which, by the way, it's already happening to some degree. For investors who like to stay cautious when investing in cannabis stocks, legality still poses one of the main dissuading questions and is perceived as a political risk.