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Reddit effect takes cannabis stocks into a wild ride

Cannabis stocks are the latest to experience the often short-lived high provided by exposure to Reddit.

Social media has proven to be a powerful driver of retail sentiment so far this year, leaving investors and analysts to wonder which company could become next. GameStop.

The focus was on pot stocks this week: Three of the five most-discussed companies on the r / WallStreetBets forum on Wednesday were cannabis companies, according to alternative data provider Quiver Quantitative.

Money followed. Retail investors have invested more than $ 440 million in cannabis stocks since the start of February, double the previous month, according to Vanda Research.

This sent prices skyrocketing before dropping this week. U.S.-listed Canadian cannabis producer Tilray started the week at around $ 25 a share, then hit an intraday high of $ 67 on Wednesday, before falling back to $ 29 by Friday’s close. The company was the second most traded stock on Robinhood’s trading app on Thursday.

“A herd of crawling bulls is rampaging through the memes store, and the cannabis industry is their business of the day,” said Ben Johnson, director of passive fund research at Morningstar.

Tilray has already attracted the attention of retail investors. After its IPO in 2018, the price briefly climbed to $ 300 a share thanks to a so-called short press – where investors pile up a stock that has been the subject of negative bets, forcing hedge funds to reverse their positions, fueling the rally.

Canadian cannabis producer Sundial was also among the most traded stocks on the Robinhood platform on Thursday. Its stock price fell from just over $ 1 on Monday to a spitting distance of $ 4 on Thursday, before falling to $ 2 on Friday. But it’s still about 83 percent higher for the week.

“You see a number of names gaining traction on Reddit r / WallStreetBets, Twitter and StockTwits long before the big move, the hype is created and there is a network effect,” said Viraj Patel, senior strategist at Vanda. Research. “Then you see the flows, the money and eventually the price action occurs.”

This herd behavior is unusual in the way investors move into and out of one asset class extremely quickly, Patel said.

Cannabis bulls point the way for US policy: Flows to cannabis stocks have increased since the US election, when legalization was passed in many state polls. The top five stocks traded on Robinhood the day after the election were all cannabinoid companies.

Canadian cannabis operators can list on U.S. exchanges because they are legally operating in Canada. However, US companies are largely unable to list on US exchanges because cannabis remains illegal at the federal level. Instead, stocks are traded on Canadian stock exchanges and “pink sheets” over the counter.

Specialty investors argued that retail investors, in attracting money to Canadian companies, were not choosing investments that would benefit from federal legalization in the United States. Some are even turning to social media to try and educate them on how to invest in American cannabis, for example through exchange-traded funds that offer greater exposure to the US market, including through derivatives.

“We’re trying to help young investors understand the difference between American and Canadian cannabis,” said Todd Harrison of CB1 Capital, a manager specializing in investing in cannabis. “Fundamentals matter. Unless these investors find the right vehicle, it will be a short exercise, ”said Harrison.

According to data provider TrackInsight, assets under management by cannabis tracking ETFs reached a record high of $ 1.9 billion. January flows of $ 527 million tripled the previous record set in December 2020.

Bulls in the industry call the potential legalization ‘Prohibition 2.0’, comparing it to the post-Great Depression period when the US alcohol ban was lifted and moonshine makers became brands well established.

But analysts warn that the fundamentals of U.S. cannabis companies have yet to be proven and that the obstacles to federal legislation are significant.

“Prohibition 2.0 is a fun story,” Johnson said. But, he added, “investors in this sector have been quite disappointed in the past with its performance. At the end of the day, the fundamentals will win out. “

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