Cannabis stocks rise as the Reddit crowd that spurred GameStop steps in. Tilray up 25%

A worker inspects cannabis plants in the grow room of Aphria Inc.’s diamond factory in Leamington, Ontario, Canada on Wednesday, January 13, 2021. Tilray Inc. and Aphria Inc. have agreed to combine their activities and create a new giant in the fast growing cannabis industry.

Annie Sakkab | Bloomberg | Getty Images

Shares of a handful of cannabis stocks soared Wednesday, the latest targets from the Reddit trading community betting on federal legalization of the plant under the new Democratic government.

Tilray’s shares were up around 25% on Wednesday, bringing earnings on the stock to over 530% year-to-date. Canopy growth is up 4% adding to its 100% rally in 2021. Aphria is also up 10% on Wednesday, increasing its profit from 275% this year. Aurora Cannabis is up 11%, bringing its year-to-date earnings above 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. Multiple posts on the social media forum show that users are optimistic about the upward movement in stocks.

“$ TLRY $ APHA calls since 1/5/2021 got me over $ 500,000 today. I still think it has a lot of upside potential,” a Reddit post said.

“Weed wants to make me a millionaire in 2021,” said another post with more than 107,000 likes.

“The rally in Canadian names is largely being driven by retail investors, possibly driven by Robinhood and Reddit. This is particularly reflected in Canadian cannabis names,” Pablo Zuanic, an analyst at Cantor Fitzgerald, told CNBC. “I’m not going to say it’s a GameStop case, but the Canadian rally isn’t entirely based on fundamentals. But when we talk to customers we tell them they are cautiously trying to shorten those Canadian names because you are know what happened to GameStop on the Rise. “

The movement in pot stocks could also be related to high short interest rates, which measure how much of the company’s traded stocks are used for betting against the company. GameStop and AMC Entertainment have been targeted in part by retailers because their high interest in shorts made the stocks attractive candidates for a so-called short squeeze. According to FactSet, Tilray’s short stake is 22.5% of the stocks available for trading. The official short interest data is current as of January 29th.

“The feedback is that some of the message boards are adding key names to their scope,” said W. Andrew Carter, analyst at Stifel, to CNBC. He has a sales rating for Canopy Growth and Aurora. Stifel has a hold rating on Aphria and Tilray.

“The shorts have been going home for the most part all year round, so the unwind isn’t as much of a tailwind as it was with the early price action, just as much buying and not much resistance,” the analyst said. “It’s very difficult to justify where these stocks are trading right now.”

While Reddit traders are seemingly optimistic about the names, Wall Street has a different mindset. Of the 14 analysts who cover Tilray, only two have a buy rating on the stock, according to FactSet. Of the 20 analysts who study Canopy Growth, only two recommend buying the stock, and of the 11 analysts who study Aphria, seven have a buy recommendation.

“For the anti-establishment movement on WSB and Reddit, this is all scripted. They sense their crowdfunding oats and are now targeting any social disorder they can cause,” said Tim Welsh, founder and CEO of the wealth management consultancy Nexus strategy, said CNBC. “And no better historical symbol to reinforce personal freedom and revolution than the pot.”

Part of the discussion on Reddit centered on the upcoming Tilray / Aphria merger. According to a December press release, Aphria shareholders will receive approximately 0.84 Tilray shares per Aphria share at the time of the deal.

David Kostin, chief US equity strategist at Goldman Sachs, said on Squawk on the Street that earnings for popular Reddit stocks were linked to a strong start to the year for small caps and a continued surge in new special-purpose vehicles.

“The pockets of surplus, if you will, or buoyancy or foam, definitely exist in some sectors … but at the end of the day prices are super low,” said Kostin.

Democrats push for pot

The cannabis companies have also received a boost from the Democratic Party, which now holds 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 put it off hold on Wednesday. The Canadian company’s share price has risen too far in view of the legalization landscape in the USA

“While we believe it is possible for Cdn LPs to secure THC exposure in the US, we do not foresee any imminent federal legalization of cannabis in the US and believe that the recent appreciation of CGC is likely is not associated with a corresponding fundamental uptrend, “Bottomley said in a note.

Tilray is no stranger to the brief press that hit GameStop and AMC last month. Already in 2018, shortly after the IPO, the Canadian pot manufacturer’s portfolio was caught in a wild short squeeze and rose by around 1,400% over the course of the day between July and September of this year.

Brendan Kennedy, Tilray CEO, told CNBC during the GameStop drama that he had PTSD years ago.

“I remember getting five different calls from Nasdaq in a single day because our stock was halted because the short sellers were under so much pressure,” Kennedy told CNBC’s “Squawk on the Street.” “My advice to these CEOs would be that at times like these, your company is not your stock and your stock is not your company.”

– with reports from CNBC’s Kevin Stankiewicz.

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