Shares in North American cannabis firms were heading for new highs on Thursday, with Reddit-inspired retail investors betting they could beat the short-sellers and benefit from new legislation that is expected under US President Joe Biden.
US-listed Tilray and Sundial Growers, which have already doubled in value so far this week, were up 6% and 50% respectively in US premarket trading, as European retail investors piled in to the rally.
Participants on the WallStreetBets forum on Reddit, which inspired a price spike in GameStop earlier this year that squeezed out Wall Street short-sellers who had bet on a price fall, have turned attention to US and Canadian cannabis firms.
"The involvement of Reddit means a frenzy is the right word," said Jasper Lawler, head of research at London Capital Group in London.
"I'm splitting the outlook in two. Reddit targeting a short-squeeze in Tilray means a quick pump and dump," he said, while others looked longer-term at benefits from potential legislative changes under Biden and his Democrat allies in Congress.
US Vice President Kamala Harris said in the presidential campaign marijuana would be decriminalised at a federal level in the United States under a Biden administration.
Swaggystocks, which aggregates sentiment on shares discussed on WallStreetBets which has about 8 million participants, showed Sundial and Tilray were the most or highly touted stocks.
Analysts said the retail bet carried risks. Chris Bailey, a strategist at Raymond James in London, said it was "still a highly speculative area where hopes may rise sharply but then disappear equally as quickly."
'REDDIT ARMY AND FRIENDS'
Short interest in Tilray, measuring the number of shares borrowed by short sellers betting on a price fall, was about 37% on Wednesday compared to 27% at the end of January, financial analytics firm Ortex said.
Short-sellers borrow stocks and sell them on, aiming to buy them back later more cheaply and pocket the difference. If the shares move up instead, they face a 'short squeeze' as they race to buy the stock to close out their positions to stem losses.
Tilray was one of the most traded stock on German trading platform Lang & Schwarz, vying with major German stocks such as Volkswagen and Deutsche Bank.
Other pot stocks, Sundial Growers and Aurora Cannabis, were also among the most active on the platform, reflecting high retail interest, traders said.
"It's the Reddit army and friends," said Stefan de Schutter, portfolio manager and Alpha Trading in Frankfurt.
Tilray jumped more than 50% on Wednesday, while US-listed Sundial and Toronto-listed Aurora surged 78% and 21% respectively.
Customers on eToro, a retail trading platform seen as an alternative in Europe to popular US platforms such as Robinhood, opened more positions in Tilray on Wednesday than in the first 10 months of 2020 combined.
One eToro user in Germany, @ChrisBro14, wrote in a thread about Tilray as it traded around $70: "Guess will go to $100. Where do you have TP limit. What do you think it will (do)?"
Interest in the sector lifted cannabis-focused exchange traded funds (ETFs) to new highs, with some more than doubling in value over the past month.