Marijuana stocks are booming — but much of investors' exuberance isn't surrounding financials so much as hype.
Simple press releases can increase a marijuana company's market value by billions.
In the case of Aurora Cannabis, one analyst has warned that "significant positive news" is already priced in, and that investors should "wait for a better entry point."
It's almost like clockwork for marijuana stocks these days: a company issues a press release and watches its stock price skyrocket, many times more than 10 percentage points in a single day.
Tilray, now the third-largest cannabis stock by market cap, is the perfect example. On at least three occasions in the past month alone, shares have rallied following what are relatively small news announcements from the Canadian producer.
Wednesday's 5% rally — resulting in a $170 million spike in market value — was fueled by the announcement that Tilray will purchase 12 million Canadian dollars worth of dried cannabis from another producer, Supreme Cannabis, for its medical offerings.
That purchase was an add on to the initial terms, which were announced on September 10, at just 2 million Canadian dollars in value — signaling the company may be having trouble keeping up with global demand for its products. Shares climbed 8.5% that day.
Announcements on two other days added a collective $4 billion to the Tilray's market capitalization:
September 18: Tilray says it will be the first to export medical cannabis to the US for a study at the University fo California San Diego. Shares climbed 28%, adding $3.24 billion to the company's market cap.
September 25: A similar agreement is announced, this time to treat patients at three hospitals in Victoria, Australia — and the stock climbed 8.4%, adding $780.5 million to Tilray's market cap.
Tilray isn't the only company with such investor exuberance surrounding its stock price. The entire industry has seen tremendous growth, which has many on Wall Street worried that valuations are getting stretched.
Aurora Cannabis, for instance, reported its fourth-quarter earnings on Tuesday. Even though the numbers weren't breakout results, shares still climbed nearly 4% in trading, adding $328 million to its market cap, as plans of a US-stock listing overshadowed any fundamentals. That's not unlike what happened when Bloomberg reported Aurora was in talks with Coca-Cola to produce CBD-infused beverages. That report alone added $1.1 billion to Aurora's market cap.
"Aurora’s shares have had significant momentum in recent weeks supported by rumors of a partnership with a global CPG company and also by the company’s intention to list on a US stock exchange," Martin Landry, an analyst at GMP Securities, said following the company's earnings on Tuesday.
"These have overshadowed delays on the production ramp-up of the company’s largest facility and a significantly larger cost structure than expected."
Because of that run-up, GMP gives Aurora a "hold" rating, adding that "significant positive news are priced into Aurora's shares and we would wait for a better entry point."
This isn't to say all stock rallies are the result of mere press releases of small announcements. When Canopy Growth received a $4 billion investment from Constellation Brands, the beverage company behind Corona beer and Svedka vodka, it put out a press release, but the $1.63 billion increase in market cap was helped along by upgrades from sell-side firms across Wall Street.
Still, there are plenty of skeptics. Short sellers, or those betting against weed stocks, have $1.7 billion riding against the sector right now. Ihor Dusaniwsky, a managing director at financial-analytics firm S3 Partners, told Business Insider that despite losing $900 million this year, short sellers don't appear to be throwing in the towel anytime soon.
"The move in Tilray is beyond comprehension," Andrew Left, founder of the notorious short-selling firm Citron Research, said last week.
"No one needs a market pundit to explain that. This is just the dynamic of trading low float stocks. Yes we are short and will hold a manageable position until rationality sets in."