GameStop Tanked, So Wallstreetbets Is Moving to Pot Stocks. They’re Headed for Trouble.

Vice President Kamala Harris introduced a bill to decriminalize marijuana as a senator.

GameStop was the darling of the merry band of traders on Reddit’s Wallstreetbets. Then this happened:

Ouch. Now the community is looking for its next play. I nosed around the message board a little today to see what that might be.

Wallstreetbets users are increasingly enthusiastic about marijuana stocks, in particular two companies called Sundial Growers, Inc and Tilray, Inc. Though both took a hit today, they are up significantly in the last month as the online buzz builds.

Reddit seems to have two main theories on why these stocks will continue to rise: a short squeeze and/or decriminalization of marijuana at the federal level in the United States. (If you’re not familiar with short squeezes, check out this post for a quick explanation.)

But their position here looks much weaker than with their last love, GameStop.

GameStop was much riper for a short squeeze than Sundial or Tilray. As of Dec 31, 2020, 71 million GameStop shares had been sold short. This is more than all the shares in GameStop that exist (70 million)! This can happen because the same share can be borrowed and sold short many times.

Meanwhile, Sundial and Tilray are nowhere near as heavily shorted. Sundial has 5% of shares sold short, and Tilray is at 19%. Compared to over 100% for GameStop, the likelihood of a short squeeze looks much, much lower.

Maybe marijuana gets decriminalized in the US. But maybe not. In any case, the Reddit traders aren’t likely to have any special information on that (nor do I). Everyone buying and selling Tilray and Sundial know about that possibility already. So it’s hard for the Reddit traders to get an edge.

Even if marijuana is legalized in the US tomorrow, Tilray and Sundial may not make a dime on it. Why? Both companies are based in Canada! To say that marijuana may be legal in America is one thing…to say we’re going to let it come across the border rather than favor our own domestic producers is quite another. Remember that we’re in a jobs crisis, so the good move for politicians is to (at least appear) to support jobs in the US.

So these are two possible rational cases to buy into these money losing companies. But what I notice over and over on Wallstreetbets is the lack of any justification at all, with people simply repeating the names of stocks over and over. Maybe Wallstreetbets doesn’t need much of a theory…they just need to get their fellow traders involved. (Or maybe it’s increasingly populated by bots.)

Thing is though, without any real rational basis for holding the stock, that same group of traders will have to get out eventually. What’s supporting the stock then?

Wallstreetbets would be better served buying broad index funds and waiting for corporate America’s money machine to work its predictable magic. But that’s just not as fun, is it?

I find this roving band of Reddit traders a very interesting phenomenon in markets. But I won’t be joining them any time soon.

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Photo: “Kamala Harris” by Gage Skidmore is licensed under CC BY-SA 2.0

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