Meme Stocks & the Marijuana Sector
One thing never gets old in this business: being way ahead of the top analysts at the big banks and investment firms. While these people make a lot of money for their prognostications, just as often as not, they’re well behind the trends (if not outright wrong).
Now we’re seeing some analysts finally catch up to something I wrote about months ago: marijuana stocks could become the next meme stocks.
First of all, what’s a meme stock?
Meme stocks first came on the scene early this year when GameStop Corp. (NYSE:GME), AMC Entertainment Holdings Inc (NYSE:AMC), and a handful of other stocks started gaining prominence on some “Reddit” message boards and other segments of the Internet. (Source: “Suck It, Wall Street,” TK News by Matt Taibbi, January 28, 2021.)
While there’s debate about how grassroots the meme stock movement is, the generally accepted story is that there was a populist uprising in the stock market. Many retail investors bought stocks that were heavily shorted by hedge funds (in some instances shorted by more than 100% of the float).
They chose stocks that they felt personally connected to, like GameStop, (which sells video games) and AMC (which operates movie theaters).
The result was enormous gains from those two stocks. As of this writing, AMC stock is up by more than 2,000% year-to-date, while GME stock is up by more than 1,000%.
Chart courtesy of StockCharts.com
Meanwhile, the hedge funds that were shorting these companies got wiped out, losing billions of dollars. After all, when you short a stock, your potential losses are theoretically limitless, and with those stocks’ prices rising higher and higher, it certainly felt like the hedge funds would never get any relief.
That resulted in backlash from establishment figures (banks, talking heads on financial news sites like CNBC, and politicians). They were upset that regular people were finally punching back at the hedge funds.
That’s the Cliffs Notes version.
Now you may be wondering, what does all this have to do with pot stocks?
Here’s what I wrote in March:
While there’s yet to be movement on marijuana stocks in any meaningful way by the Reddit investing community, there’s actually a lot about the marijuana sector that would appeal to them.
First, it’s a visible industry with a consumer product.
Second, it’s an industry that has, for as long as it has been legal, had a number of skeptics who have bet short on a variety of stocks. While hedge funds have largely steered clear of pot stocks due to the federal U.S. prohibition, ultimately there are a few analysts who have been doubtful about the market’s potential, which could potentially rile up the Internet folks.
The most important part: there’s a lot of potential locked within weed stocks. Even a brief analysis of the market shows there are billions of dollars yet to be made from it.
With all those factors coming together, I’d argue that there’s a better-than-zero chance that marijuana stocks could become the next meme stocks. And if they do, we can expect volatility to increase wildly.
As mentioned earlier, I proved to be ahead of the curve on that.
On June 5, noting a slowdown in net inflows to AMC stock, Vanda Research said, “Retail purchases of meme stocks probably peaked on Wednesday.” (Source: “A Rotation Into Cannabis Stocks by Retail Investors Has a Lot More Room to Run as the Latest Meme-Stock Rally Fades, Research Firm Says,” Market Insider, June 5, 2021.)
But Vanda Research also noted that inflows to cannabis stocks like Tilray Inc (NASDAQ:TLRY) and Sundial Growers Inc (NASDAQ:SNDL) were their strongest since the rallies earlier this year. The research company said it believed that this marked a rotation out of meme stocks and into marijuana stocks.
“As opposed to BlackBerry, we think the rotation into cannabis stocks has a lot more room to run,” said Vanda Research, illustrating that Sundial and Tilray were the fourth- and seventh-most active tickers on “WallStreetBets” forums in recent weeks. (Source: Ibid.)
WallStreetBets was the main Reddit forum spurring on the meme stock action to begin with.
So what we’re seeing is that retail investors, keen on finding other stocks to flood capital into, may eventually go to marijuana stocks. Pot stocks have way more potential than stocks from dying industries like video game retailers and movie theaters.
If the meme investors get into marijuana stocks, that would be a huge boon to pot stock prices. In other words, it could be a good idea to invest in advance of this potentially huge flood of capital.
Remember that the Reddit market warriors like to invest in concrete things that they interact with every day (cryptocurrency excepted). And that makes pot a prime candidate for their attention.
Predicting the next meme stock has become big business, with analysts in every fund and firm on Wall Street trying to avoid becoming the next short disaster—or trying to predict the next target and get in before the rush.
As the original meme stocks begin to wind down, there’s a good chance that marijuana stocks could become the next targets of meme investors. If that happens, we could see hundreds—maybe even thousands—of percentage points in gains from the top pot stocks.