Tilray Inc. fell 50% Thursday, the most ever, halting a record three-day rally as another Reddit-inspired push into cannabis stocks quickly unraveled.
The loss helped push the ETFMG Alternative Harvest ETF, known by its ticker MJ, down 25% in its biggest ever drop as other pot stocks also see-sawed from gains to losses. Canopy Growth Corp., the biggest cannabis company by market value, also took a sharp drop ending 22% lower.
“The market has a pretty bad case of ADHD these days, and the latest shiny object for what has been a rabid retail crowd is cannabis stocks,” said Ben Johnson, Morningstar’s global director of ETF research. “The all-important question is whether all of those fundamentals, all of that enthusiasm is priced into the shares or not.”
The week’s earlier rally was reminiscent of late 2018, when Canada was about to become the first large economy to legalize recreational marijuana use, sending cannabis stocks surging. Tilray’s three-day gain to start the week was its biggest ever, although it’s still well below the intraday high of $300 it hit in September 2018.
Short sellers have been paring back bets against the pot sector since the start of the year amid organized short squeezes on Reddit, according to a report from S3 Partners. Short interest across the sector as a percentage of float has decreased to 15% from 24% on Jan. 1.
However, Tilray has been a major outlier after merger arbitrage traders began building up short positions following its announced merger with Aphria Inc. in December, said Ihor Dusaniwsky, S3’s managing director of predictive analytics.
Tilray has seen over $1 billion of new short selling, bringing its short interest to 23% of available shares, according to S3. That has made it a ripe target on Reddit as users have also touted possible regulatory reforms in the U.S.
Gains in Tilray led the sector’s rise earlier. However, Anson Funds Chief Investment Officer Moez Kassam said that could be because it’s one of few cannabis stocks easily available to Robinhood or day traders in the U.S.
Canadian-listed firms with U.S. operations may be better poised to benefit from U.S. legalization and retail investors may be ignoring stocks like Curaleaf Holdings Inc. and Harvest Health & Recreation Inc., making it an ironic trade, Kassam said.