Cannabis stocks plummeted on Thursday, with many of the industry’s best performers a day earlier yielding their gains, with relentless buying in recent weeks amid rising hopes for strict US law reforms coming to an end.
Cannabis ETF THCX,
had fallen 18.1% in the middle of the afternoon, putting it on the way to its biggest drop in a day since it started trading in July 2019. The previous record sale was a 14% loss on March 12, 2020 .
Tilray Inc. TLRY,
dropped 40%. The shares gained 50.9% the previous day, the biggest gain in a day since they rose 56.8% on March 26, 2020, closing Wednesday at an almost two-year high of $ 63.91. The stock soared 148.5% amid a three-day winning streak ahead of Thursday’s retracement. Aphria Inc. APHA,
APHA,
with which it is merging, it fell 28%.
“Things got way ahead of themselves,” said Korey Bauer, investment director and portfolio manager for the Cannabis Growth Fund at Foothill Capital Management.
While some of the recent purchases appeared to be driven by a group of investors on Reddit who had sent the shares of video game retailer GameStop Inc. to record highs in recent weeks, “we have also had record flows in exchange-traded funds and mutual funds in recent weeks. ”Said Bauer.
“There has been a massive shift, and most people are buying Canadian cannabis stocks, who will not be the direct beneficiaries of any reform of laws in the United States. It has been very difficult with these changes, ”he said.
The demonstration was triggered by the election of President Joe Biden and Vice President Kamala Harris, both considered in favor of reforming the strict US federal cannabis laws, which, despite the progress made by medical marijuana advocates, continue to classify it like a Table I drug, alongside others like heroin.
This has hampered the development of the legal market, which is limited to states that have legalized cannabis for medical or recreational use, and has kept companies out of the federal insurance banking system.
With more states voting for legalization at the November ballot box, and with New York expecting to enter this year and create a market that rivals California’s, investors are looking at the sector with renewed interest.
“There are reasons 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 broadcaster of MJ ETF MJ,
“But while the cannabis industry is clearly growing globally and many cannabis companies are on the path to profitability, the recent rise in cannabis stock prices appears to be becoming overly exuberant.”
Even in the midst of the 40% drop on Thursday, Tilray, for example, continues to rise 129% in the past 12 months, despite its continued loss and struggle to increase revenue.
Tilray is the most sold share in the cannabis sector, with the shares sold representing 23.1% of the public float as of Wednesday, according to S3 Partners LLC. But despite this big short position, the recent hike was not the result of a slight squeeze.
Data: The best-selling shares in the United States at the end of January
Ihor Dusaniwsky, managing director of predictive analytics at S3, said that bearish bets on Tilray have actually increased this year. The value of the shares sold short was $ 1.33 billion, more than $ 1 billion since the company announced its merger with Aphria in December.
Despite the advantage that Canadian companies enjoy with cannabis – Canada fully legalized the plant for adult recreational use in October 2018 – companies have been struggling to achieve profitability, as the launch delayed expectations and bureaucracy made it difficult to open up. retail stores. This allowed the black market to thrive and compete with the legal sector, where prices are higher.
“There is a huge oversupply in Canada and definitely some risk in Canadian names,” said Bauer. “We still think that some of the operators in several US states are attractive, but as they are not listed on major exchanges, there is a disconnect between the ratings in the US and Canada.”
Because of the federal ban, U.S. cannabis companies trade over-the-counter or on Canadian exchanges, although there is growing optimism that will change soon.
Senate majority leader Chuck Schumer and two of his Democratic colleagues have pledged to introduce marijuana legislation in the current Congress. This raised hopes for at least one safe-haven banking language, which would guarantee companies access to banks and open capital markets.
Read now: Cannabis stocks rise after Chuck Schumer leads a campaign for reforms that could end the federal ban
“Anything that would allow American companies to grow would be extremely beneficial,” said Bauer.
In the meantime, investors must tighten their seat belts.
“Given the very strong price gains in the past few days, I would expect to see volatility in cannabis stock prices as we begin to see downward pressure related to profit making and potential short selling,” said Wilson.
Smoke Wallin, chief executive of Vertical Wellness, a maker of CBD-based wellness products, agreed, but said that individual investors entering the market are now making the right move in anticipation of a flood of institutional money as soon as the rules are relaxed.
“This does not mean that any individual stock trading up or down makes sense in today’s valuations,” he said. “But all holders who believe in the fundamental shift to a broad-based national legal cannabis market will be highly rewarded.”
With a large crop of private companies preparing to enter the market in the next 12 to 18 months, there will be more targets for acquisitions, he said.
“So there will be a lot of mergers and acquisitions in the next 12 months, there will be a lot of capital flowing and I think individual quotes will go up and down, with volatility,” said Wallin.