Cannabis stocks on a high after Reddit crowd switches focus to buoy sector

Published On: February 12, 2021Categories: Stocks & Shares2.6 min read

Cannabis stocks, another target of hedge fund shorters, have seen sharp gains as the Reddit crowd of small investors turned its attentions to the sector. The millions strong membership of subreddit community #WallStreetBets has been causing chaos in financial markets over the past couple of weeks in their attempts to squeeze short positions taken by hedge funds.

Two weeks ago, the Reddit group’s target was a number of unloved stocks, most famously video games retailer Gamestop, targeted by Wall Street’s financial establishment for short positions. Orchestrated by a handful of more experienced ringleaders, the crowd piled into long positions on the stocks, driving prices up dramatically. The Gamestop share price rose by more than 100% in intraday trading at one point.

The plan was to profit at the expense of the hedge funds holding short positions on the same stocks by running up their paper losses to the extent they were forced to close positions, cutting losses but also crystalising them. Initially, the strategy worked well by virtue of its element of surprise.

Melvin Capital, one of the hedge funds holding short positions, was caught out and, overexposed, forced to cut its short positions and take a heavy loss. It only survived by virtue of a $2.8 billion bailout from fellow hedge funds Citadel and Point72 Asset Management.

However, the hedge funds refused to cede their positions, aware that doing so would leave them dangerously exposed to future attacks by the same, or copycat, crowds of small investors coordinating their actions in online forums. They dug in on Gamestop and a number of the other original targets of the #WallStreetBets crowd, using their combined financial muscle to hold out long enough for their attackers to run out of steam.

That has resulted in the Reddit crowd turning their attention to new targets, including silver and, now, cannabis stocks. The share price of Tilray, a leading Canadian producer of the drug, newly legalised for medical use and in some cases recreations across several parts of the world, rose by over 50% yesterday.

Another factor in favour of cannabis stocks over the past couple of days has been social media noise around the potential for decriminalisation in the USA at a federal level under the Biden administration. A growing number of states have decriminalised or legalised medical, and in some cases also recreations, use of the drug. But it’s still illegal at a federal level, which can make it difficult for legal cannabis companies to make use of financial services.

The WallStreetBets subreddit has itself seen a lot of discussion in recent days around the sector’s massive growth prospects.

Including yesterday’s 50.9% gains, the Tilray share price is up over 500% this year. Aphria, the medical cannabis producer in the process of taking Tilray over through a reverse merger, saw its share price gain 6%. And companies across the sector have been seeing a sharp rise in their valuations this year, accelerating over the past couple of days. However, many analysts have expressed doubts over just how much Canadian cannabis companies stand to gain if the drug is decriminalised in the USA. There are also domestic cannabis companies who would be best positioned to take advantage of any change in the drug’s legal status south of the border. Especially if the legal structure favours home-grown companies.

The wealth manager Canaccord Genuity recently told clients in a note that it feels there has been a “disproportionate amount of capital flow” into Canadian producers.

About the Author: Jonathan Adams

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