Markets

Weed stocks tank as Reddit trade loses momentum

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Key Points
  • Shares of several cannabis stocks fell on Thursday after a big pop earlier this week.
  • Names like Tilray, Canopy Growth, Aphria, Aurora Cannabis and Sundial Growers garnered attention from the same group of Reddit traders that contributed to the epic short squeeze in GameStop last month.
  • Part of the discussion on Reddit has centered around the pending merger between Tilray and Aphria.
  • Other social media users are mentioning the possible decriminalization of the plant at the federal level under the Biden administration.
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Analyst on the cannabis stocks most vulnerable to a short squeeze

Several cannabis stocks dropped Thursday, giving up some of the sharp gains from earlier this week as Reddit traders piled into the names.

Shares of Tilray fell 49.7% after rallying 50% on Wednesday. Aphria lost nearly 36% and Aurora Cannabis fell 23.5%. Canopy Growth shares declined by 22%.

These pot stocks were poised to extend their rallies before Thursday's open, surging in premarket trading. Shortly ahead of the market open, however, the names turned sharply lower.

Cannabis stocks sink on Thursday

The group of cannabis companies garnered attention this week from the same WallStreetBets Reddit army that contributed to GameStop's epic short squeeze last month. The social media members have been posting messages about their profits in pot stocks and encouraging other traders to join in.

"Here we go my! TLRY to the mooon!!!" one post said Thursday.

"Weedstocks, the new WSB darling," another post said.

However, the trade appeared to unravel on Thursday, with the stocks coming back down to Earth. Several analysts that cover the cannabis companies told CNBC on Wednesday the price action this week has little basis in fundamentals.

Part of the discussion on Reddit has centered around the pending merger between Tilray and Aphria. Other social media users have mentioned the possible decriminalization of the plant at the federal level under the Biden administration as a positive catalyst for the group.

The move in pot stocks could also be related to high short-interest ratios, which measure how many of a company's traded shares are being used in bets against a company. GameStop and AMC Entertainment were targeted by retail traders in part because their high short interest made the stocks attractive candidates for a so-called short squeeze. Tilray's short interest is equal to 22.5% of the shares available for trading, according to FactSet.

Some of these retail investors have been holding onto these stocks since 2017 and 2018 and are expressing optimism about the newfound interest from other investors.

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