A Cannabis Gamestop Equivalent? The Reddit Effect on US Cannabis Stocks

Are Reddit users about to do it again? $400 million flooded into the cannabis stock market in a move similar to January’s Gamestop phenomenon.

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  • Redditors at r/wallstreetbets have turned their attention to cannabis stocks in the hope of reviving their earlier success with Gamestop in January.
  • Since the start of February, Redditors have put over $400 million into cannabis stocks.
  • It’s a process called “short squeezing”. This is when investors suddenly put a lot of money into stock that has been predicted by traders to fall, resulting in them having to buy lots of shares in the “failing” asset in order to prevent greater losses.
  • It has taken the value of cannabis stocks on a rollercoaster ride of spiraling highs and crashing falls. However, many companies’ gains remain above average over the month.
  • Shares in cannabis have grown in response to several US states introducing cannabis legalization legislation, as well as speculation that the Biden Administration will legalize cannabis at federal level.
  • US-based Cannabis CEOs have responded on Twitter in an attempt to differentiate themselves from their Canadian counterparts and to highlight cannabis’ investment opportunity in the US.

In among the elusive world of stocks and shares, Redditors over at r/wallstreetbets have struck again. 

Since the beginning of February, casual investors on the subreddit describing itself as “4chan found a Bloomberg terminal” have poured $440 million into short-sold cannabis stocks, in an act reminiscent of January’s Gamestop phenomenon. 

This is a process called “short-squeezing” and hedge fund owners don’t like it. The result is unfavorable for traders who borrowed stock hoping to make a profit from the asset losing value. It forces them to buy back at a much higher rate to prevent further losses to their investment. Stocks rapidly increase in value in response to this.

The Reddit Effect on Cannabis Stocks

Redditors know full-well the influence they have on the stock market and are completely aware of the positive effects they have on short-term growth. Companies such as Tilray, Sundial and Global X Cannabis saw their best year-to-end results when the markets closed on Wednesday, February 10th.  

However, by the next day share values in Tilray and others had dropped significantly. This not only highlighted the volatile nature of short-squeezing, as well as the stock market in general, but also the possible petering out of Reddit’s momentum in the long-term; the latter of which has sparked criticism from experts.

“A herd of rampant bulls is running amok in the meme stock shop, and the cannabis industry is their sector du jour,” said Ben Johnson, director of passive funds research at Morningstar. He described the phenomenon as “the latest shiny object” in a market that is, according to Johnson, having “a pretty bad case of ADHD these days.” 

Despite this, Tilray’s stocks in particular are still 421% higher than its year-to-end predictions.

Cannabis Company CEOs Encourage Reddit Users

Reddit’s actions have prompted a flurry of responses from US-based cannabis CEOs on Twitter using #MSOGang, a hashtag originating from around August last year. It seeks to push against investors’ reluctance to buy into cannabis stocks by promoting the US cannabis industry as a legitimate option.

This really isn’t surprising at all, is it? Of course cannabis company CEOs want to encourage investment. The financial support will do wonders for cannabis innovation and research and development, as well as helping build a stronger business foundation via expansion. 

Investor hesitancy is due to the current patchy nature of cannabis regulation in the US. However, several US states have introduced legislation that could see cannabis either decriminalized or legalized in some form. This has led to speculation that legalization at the federal level will happen this year under the Biden Administration, which has resulted in cannabis companies reporting revenue growths. 

How Cannabis Legalization May Affect Stocks

First off, Biden hasn’t explicitly stated he’s going to legalize adult-use marijuana across the US at the federal level. He hasn’t even hinted at the idea of reforming the Controlled Substances Act to allow marijuana more freedom than ever before.

Kamala Harris, on the other hand, is looking at descheduling marijuana with her Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act. 

Cannabis reform and how it’ll affect cannabis stocks is subject to mere speculation at this point. They rose in November during and after the US General Election, which saw Biden become the main man in The White House. They spiked again when Democrats took control of the Senate. 

Cannabis legalization will most likely cause another cannabis huge stock market spike and level out once the inevitable hype quietens down. 

The problem with hype is it doesn’t last long — and investors often forget this. They “hold” for the long-term but cannabis’ stock temperament is volatile. 

Seeking Differences Between Canadian & American Cannabis Stocks

#MSOGang’s other mission is to illustrate the difference between Canadian and US stocks in the hope that increased investment will offer more exposure to American companies that are currently tucked away in lesser-known areas of the stock market. 

At present, American cannabis companies are unable to list on the US stock exchange because cannabis remains illegal at the federal level. Instead, they trade off exchange via “pink papers” on almost entirely unknown Canadian exchanges and receive very little money from American investors. 

Canadian companies, on the other hand, which are permitted to list on the US stock market due to cannabis being fully legal in Canada, are pocketing investment dollars due to their visibility.

“We are trying to help young investors understand the difference between US and Canadian cannabis,” said Todd Harrison, investment manager of CB1 Capital. “Fundamentals matter. Unless these investors find the right vehicle it’s going to be a short exercise.”