- Cannabis stocks like Tilray and Sundial have seen a volatile stretch of trading.
- The stocks have surged and plummeted, driven in part by online forums like WallStreetBets.
- Experts say that retail investors should focus on US cannabis stocks like Green Thumb and Trulieve, rather than Canadian companies.
- Visit the Business section of Insider for more stories.
The biggest cannabis stocks had a wild week. They got slammed on Thursday, after soaring on Wednesday.
Retail traders spurred by the Reddit forum WallStreetBets drove some of the volatile trading, which centered on Canadian cannabis companies.
Tilray, which skyrocketed 51% on Wednesday, fell 50% by Thursday’s close. Sundial Growers, another favorite of the WallStreetBets crowd, dropped 19% Thursday after surging 79% on Wednesday. Aphria dropped 36% on Thursday after several days of gains.
Cannabis stocks have been gaining since November, when Joe Biden’s victory in the presidential election and the success of state cannabis-legalization measures gave the industry fresh tailwinds. Tilray shares have almost quadrupled since the start of 2021, for example.
Why Canadian cannabis stocks are the wrong investment
Still, for traders looking to place bets on US marijuana legalization, Canadian cannabis stocks may be the wrong investment, Cantor Fitzgerald analyst Pablo Zuanic told Insider.
Zuanic said he would advise traders to buy shares in US companies like Curaleaf — the largest US cannabis company by market capitalization — as well as other US cannabis retailers, like Trulieve, Cresco Labs, and Green Thumb Industries. US cannabis companies that operate in several states are known as multistate operators or MSOs.
“In terms of fundamentals, we, prefer the valuations and the fundamentals of the US MSOs,” Zuanic said.
US companies have also largely been profitable for a few quarters — unlike their Canadian counterparts — and have built out stores and other assets that will help them take advantage of US legalization quickly, if it happens.
Right now, Canadian cannabis companies can’t operate across the border in the US, at least with any products that contain THC, the main psychoactive compound in cannabis, because cannabis is federally illegal. Many of them have laid plans to do so when that becomes legal.
Retail traders who use platforms like Robinhood and other free trading apps aren’t able to buy shares in US companies, because they’re listed on the Canadian Securities Exchange and trade over-the-counter in the US. Major Canadian cannabis companies trade on US exchanges, meaning retail investors more readily have access to these stocks.
It’s “very easy” on the Robinhood app to buy or sell Canadian cannabis stocks like Aurora, Zuanic said, which may be what drove retail investors to purchase shares in those companies.
‘The Canadian theme has really played out’
“The Canadian theme has really played out,” John Decourcey, an analyst at the cannabis-focused advisory firm Viridian Capital said. “And the only thing that left in that market, that’s an advantage, is access to institutional investors.”
Decourcey said that most of those institutional investors took the opportunity to cash out as the stocks “have really pumped up” in recent months.
“That is just going to leave some investors kind of holding the bag who don’t really understand this space,” he said.
That echoes comments from Merida Capital Partners’ Mitch Baruchowitz, who told Insider that he predicted a lot of investors would “get hurt” by the wild swings in the market.
All that doesn’t mean cannabis isn’t a good opportunity for investors. It just means investors should be careful to select the right companies and be ready to weather the volatility that comes with emerging industries.
“Cannabis is probably frankly going to be everywhere and it’s a very good opportunity to get in on — I won’t call it the ground floor — but relatively close to the ground floor,” Decourcey said.
His best advice for investors who are serious about cannabis?
Look at some of the smaller US cannabis companies, because the largest ones have already been “over-invested,” Decourcey said.
“So a company with more than a billion dollars in market cap, but aren’t quite those biggest MSOs — I would invest my money there,” he said. “If the biggest MSOs are over-invested, these next companies are under-invested.”