The cannabis sector got a boost last week when Amazon (NASDAQ: AMZN) said it supported U.S. federal marijuana legalization legislation. Canadian companies that want to grow in a legal US market also benefited from this. Some of these names have moved on social media because of retailer interest, and it can be hard to tell whether or not they are trading more on the potential for business fundamentals. Today things are going up and three Canadian names are moving as follows as of 12:45 p.m. EDT:
Movements in these stocks can be attributed to retailers by looking at various metrics. Aside from the fact that there is no company-specific news, sharp jumps in the average daily trading volume over 30 days are a good guide. This recent spike has occurred in Sundial and Aurora stocks.
Another focus of retailers is short interest as they try to partner up and drive stocks up until short sellers have to cover, which means they’ll buy back stocks that were previously sold. All three of these cannabis stocks have a pretty high percentage of stocks that are held empty. According to MarketWatch, OrganiGram held 5.8% of its float, Aurora 18% and Sundial 24% in mid-May.
So while it’s obvious that some cannabis stocks (Sundial and Aurora in particular) seem to be moving primarily thanks to the WallStreetBets crowd, there are more fundamental factors that have been attracting investors lately.
U.S. states continue to legislate to decriminalize or legalize marijuana for a variety of purposes. Recently, traditionally conservative Alabama became the 37th state to legalize medical marijuana. The retail giant Amazon is also contributing to the legalization fever, stating that it no longer checks certain employees for marijuana depending on job requirements.
Investors should continue to focus primarily on fundamentals in addition to speculating on a big new market in the US. There is some bad news in this regard, however. In the first quarter financial data released last month, Sundial said gross sales were down 30% sequentially compared to the fourth quarter of 2020, and a similar amount compared to the first quarter last year. One of the main obstacles facing the company has been a lower product sales price. On his results conference call, Sundial CFO Jim Keough said the average gross retail price of branded products was down 24% quarter over quarter, “reflecting industry pricing pressures and consumer shift towards value-added products.”
This is what longer-term cannabis investors should be focusing on. The popularity of stocks on social media will wane. What is left is the underlying business. Whether it is about improving prices in their home market or growing into new markets, that has to improve in order for these companies to be successful in the long term.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.