It didn’t take long for the social media crowd to find a new stock trading meme to take the place of the now-fizzled GameStop phenomenon. Starting at the beginning of February, the mostly-millennial posters at WallStreetBets — the Reddit forum behind the meteoric rise and fall of the short-sale issues often favored by hedge funds — turned its attention to cannabis.
“Here we go … TLRY to the moon!!!” said one poster about Tilray. “Weedstocks, the new WSB darling” said another about the sudden new cannabis focus. Suddenly, a number of cannabis issues were trading at their all-time highs as posters continued to boast about the massive returns they were about to earn. But then literally overnight, the momentum reversed as everyone started to sell; trying to either take profits or minimize their losses.
So after a 50% rally upwards, Tilray fell 49.7% the very next day. The shares of Aphria, the company with which Tilray will be merging, also fell 35.99%. This is not to say the companies are necessarily poor buys; Tilray, for example, remains up 129% over the last 12 months, albeit being one of the most shorted stocks in the cannabis sector. Canopy Growth, even after this selloff, is up 71% year-to-date. But the cannabis example is now casting doubt on the Reddit forum’s ability to produce another GameStop-like rally in the future.
At the same time, north of the border, traders expecting a 9,500% — yes, that’s thousands —return on their cannabis investments were sadly mistaken. The micro-cap company Nabis surged from a penny to nearly a dollar at the beginning of February — until the Canadian Securities Exchange stepped in, halted trading, cancelled any short selling, and nullified all trades made over the one-week period. Trading on the company’s shares will not resume until March 1st. (Interestingly, Robinhood — the online no-fee brokerage platform favored by the WallStreetBets crowd — does not allow trading in over-the-counter shares.)
So what is the disciplined outlook for cannabis stocks in 2021? While industry analysts are all in agreement this recent rally was unsustainable and unsupported by market valuations, nonetheless they are bullish on the industry — for the long term. Few see broad U.S. legalization happening as quickly as individual investors wish; the eventual law will no doubt reflect both compromise and a paring down of its provisions. In addition, with the pandemic remaining front and center, Senators Chuck Schumer, Cory Booker and Ron Wyder have committed to releasing a “discussion draft” on cannabis reform this year, but nothing more.
On top of this, there are unresolved questions how competition will shake out should federal restrictions fall. America’s state-by-state patchwork of cannabis laws is an impediment to market entry from Canadian producers, and consolidation among operators comes with a raft of complications.
It’s certain that there is going to be continued volatility in the sector, with a lot of M&A activity as a raft of new private companies enter the market. But as rules are eventually relaxed that will allow companies to trade on the NYSE and Nasdaq exchanges, and allow institutional money to flow inwards, analysts do foresee an inexorable shift to a fully-legal cannabis market that will reward investors who are making plays for the long term.