Reddit forums turn to cannabis sector as stocks hit new highs

Shares in cannabis companies surged on Wednesday, extending a months-long rally due to bets on decriminalization under the Biden administration, as the Reddit community behind a recent trading frenzy talked up the stocks.

One post on WallStreetBets, the Reddit forum linked to the past month's surges in GameStop Corp, AMC Entertainment and others, told users that shares of producers Tilray Inc and Aphria Inc have more room to rise.

That post was liked by around 10,000 other users in just twelve hours and shares in the two companies jumped by 21% and 10%, respectively.

The forum has become a must-watch for traders at financial institutions since concerted action by some of its 8 million participants proved enough to overturn hedge fund "short" bets on GameStop and others in January.

Swaggystocks, which aggregates sentiment on shares talked about in the WallStreetBets forum, showed Tilray was the most upvoted stock in the group.

"I don't think the retail punter story goes away overnight," said Mirabaud sales trader Mark Taylor. "I am really only watching the price action and trying to make sense of it all."

US-listed shares of top pot producer Canopy Growth Corp were up 3% after results on Tuesday, while the ETFMG cannabis stocks tracker, which has more than doubled in value since November's presidential elections, gained 7.3%.

In line with some of the conditions that spurred the GameStop rally, short interest in Tilray was on the rise. About 37% of its free float was out on loan compared to 27.3% at the end of January, according to analytics firm Ortex.

The company, being taken over by Aphria in a complicated reverse merger, has gained more than 400% in value since the deal was announced in December on the back of new agreements to supply its medical cannabis to European markets.

Aphria has gained 243% over the same period, as companies across the sector surged on a wave of legalization in major US states and the Democratic party's promise to decriminalize the plant at the federal level.

Changes promised by some in President Joe Biden's party could help give cannabis companies access to more traditional methods of banking and open the sector to new, institutional investors.

However, some analysts argue the valuations of the companies are becoming unjustifiable, especially for Canadian companies like Tilray, Aphria and Canopy Growth, which may gain very little from US changes.

Canopy reported a reduction in adjusted losses in third-quarter results on Tuesday but Stifel analysts said those fell short of justifying its current valuation.

Another brokerage, Canaccord Genuity, said the US election related enthusiasm had caused a "disproportionate amount of capital flow" into Canadian producers.