Explainer: Different stonks: Why Gang Weed is not the next GameStop
12/02/2021 06:00
Feb 12 (Reuters) - North American cannabis companies
rocketed in value in recent days - before plunging on Thursday
urn:newsml:reuters.com:*:nL8N2KH3LD - as the Reddit forums behind a month of frenzied
stock market trading stoked interest in a sector booming on the
back of expectations of decriminalization.
However, the investment case for the sector's biggest
players, nicknamed Gang Weed by Reddit's WallStreetBets
community, differs substantially from that of GameStop Corp
GME.N - or "Gamestonk" as it was dubbed by many online - and
from other retailers involved in the past month's surges.
WHY CANNABIS?
Pot stocks have been rising for months, fueled by state
moves toward decriminalization across the United States and,
since November, expectations that President Joe Biden will seek
to relax federal prohibitions on marijuana.
With Democrats also taking of control of the Senate,
Majority Leader Chuck Schumer promised last week to make the
issue a priority.
Federal decriminalization would allow interstate movement of
cannabis products, making it possible for companies to begin
operating in a similar fashion to the alcohol industry.
At the same time, banks and other financial institutions,
previously restrained by the federal prohibition, will be able
to work with cannabis companies, giving the industry access to
much-needed financing.
However, experts caution against over-enthusiasm and say
actual changes could require full legalization.
CANADA-CENTRIC
For now, no U.S. marijuana producer has been allowed to list
on a U.S. exchange and U.S.-based investment and mutual funds
have largely avoided investing in Canadian-listed producers.
As a result, in contrast to GameStop, much of whose stock
was held by major U.S. financial institutions, the companies
driven higher in the past week tend to be owned by a much more
diverse range of small hedge funds, investors and venture
capitalists.
The biggest investor in Sundial Growers Inc SNDL.O , for
example, is hedge fund Hudson Bay Capital, with a small stake of
1.26%, according to Refinitiv data. No other financial investor
holds more than 1% of its shares.
This means that the rally to date has likely already been
driven by small - or "retail" - investors.
On Reddit's WallStreetBets thread, Sundial, Tilray Inc
TLRY.O and Aphria Inc APHA.TO were the three most discussed
stocks on Wednesday, according to one regular count of the
number of mentions. (https://www.reddit.com/user/pdwp90/)
SHORT OF SHORTS
The huge rises in shares of GameStop, cinema operator AMC
Entertainment Holdings Inc AMC.N and Blackberry Ltd BB.TO
last month were also the result of a squeeze on hedge funds and
other investors who had taken out "short" bets on those stocks
falling.
After months of gains, short interest - the percentage of a
company's shares that have been borrowed as part of short trades
- in the marijuana companies is an average of just under 14%.
Tilray, among the biggest gainers but also engaged in a
complicated merger with rival Aphria, has the highest short
interest, at just over 23%, according to financial analytics
firm S3.
That compares with the peak short interest as a percentage
of the shares in GameStop on Jan. 4 at 141.86%, according to S3.
That means that any squeeze on investors who have bet against
the stock will have less impact.
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Reddit rally in cannabis stocks stubbed out urn:newsml:reuters.com:*:nL8N2KH3LD
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(Reporting by Shariq Khan and Patrick Graham in Bengaluru
Additional reporting by Megan Davies in New York
Edidting by Matthew Lewis)
((Megan.davies@thomsonreuters.com))