As investors chase pot stocks rally, some show caution: 'This is just stupid time'

Key Points
  • Veteran traders and investors are cautious on buying pot stocks after the sector's surge, saying the frenzy is reminiscent of previous bubbles.
  • “This is just stupid time. I can’t believe the valuations at this stage,” Investitute co-founder Jon Najarian says.
Marijuana stock Tilray soars 50 percent

There is a new mania infecting the stock market: pot stocks.

Cannabis-related names are soaring as companies and investors are clamoring to get exposure to the burgeoning marijuana-legalization trend. But many veteran traders and investors are cautious on buying pot stocks after the sector's surge, saying the frenzy is reminiscent of previous bubbles.

In June, Canada announced it will legalize recreational marijuana use effective Oct. 17, sparking a series of industry moves. Soon after Canadian marijuana producer Tilray filed for an initial public offering, which occurred in July.

In August, Molson Coors said it will partner with The Hydropothecary Corp. to develop cannabis-infused beverages for the Canadian market. Later that month beer maker Constellation Brands invested an additional $4 billion in Canadian-cannabis producer Canopy Growth.

As a result of the news, pot stocks are soaring. Canopy Growth's stock has more than doubled this year.

Tilray shares are doing even better and have become the poster child of the pot stock frenzy.

The marijuana producer's shares are up more than 800 percent since its first day of trading after its July IPO and rose nearly 600 percent in the past month. The stock rallied as much as 94 percent Wednesday, a day after its CEO, Brendan Kennedy, told CNBC's Jim Cramer that pharmaceutical companies should partner with cannabis producers as a "hedge" against the space. Tilray shares later pared its gains and closed up 38 percent for the trading session after multiple volatility halts.

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One investment banker believes the pot stock party is just getting started and predicts more public offerings from the industry.

"Clearly investor appetite for Cannabis companies is on the rise. This is a global sector that is opening up and the early movers are reaping the rewards in their valuations and access to capital," Canaccord Genuity's Graham Saunders said in an email Wednesday. "The race is on and the landscape of large publicly-listed U.S. Cannabis companies is about to increase materially."

Extreme valuations

But Wall Street traders warn Tilray's valuation is getting too extreme after its stock move. The company has a market value of about $20 billion and trades at nearly 500 times its 2018 estimated sales versus the S&P 500's 2.2 times sales, according to FactSet.

Tilray reported just $17.6 million in sales over the last two quarters with a net loss of $18 million in the same time period.

"This is just stupid time. I can't believe the valuations at this stage," Investitute co-founder Jon Najarian said in interview Wednesday.

The trader said he rode some of Tilray's move higher after its IPO, but isn't currently long the shares.

One well-known short seller, who actually recommended Tilray's shares in the middle of August, also believes the market has gone too far.

"The whole space is crazy, but Tilray is crazy in a life of its own," Citron Research's Andrew Left said in an email Wednesday. Left confirmed he is short Tilray shares on social media earlier Wednesday.

Another Wall Street trader compared the mania surrounding pot stocks this year to 2017's cryptocurrency market craze. For example, Riot Blockchain shares surged by more than 400 percent during the fourth quarter of last year.

"It reminds me of Bitcoin / Blockchain late in 2017 … There was a stock called RIOT who experienced explosive growth in its stock price simply because it was one of the few ways to invest in bitcoin publicly," Baird institutional sales trader Michael Antonelli said in an email Wednesday. "Humans are emotional creatures and nothing is worse than seeing your friend get rich in a pot stock, while you sit in an index fund. So I have little doubt that people are chasing the stock higher so they don't feel left behind."

Riot Blockchain shares are down more than 85 percent this year.

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