What happened

The WallStreetBets forum on Reddit is getting more publicity this week, with reports on CNBC that the crowd behind recent short-squeeze momentum names is now focused on the cannabis sector. 

Trading in the sector is volatile again today, with shares moving as follows as of 10 a.m. EST:

  • Tilray (TLRY) is down 35%.
  • Sundial Growers (SNDL -4.31%) is up 4%.
  • OrganiGram Holdings (OGI -5.37%) is down 23%.

So what

Cannabis stocks in general have been soaring since the start of the year, partly due to politics and hopes for more progress toward federal legalization in the U.S., and also from growth in some of the underlying businesses, as well as consolidation, with Tilray set to combine with Aphria (APHA)

Today, shares are retreating from the outsized gains on Wednesday, when Tilray soared 50%, OrganiGram 37%, and Sundial Growers almost 80%. That volatility was likely heavily impacted by the retail traders focusing on the sector. But there is company news for investors to review as well. 

marijuana leaf on top of $100 bill

Image source: Getty Images.

Now what

With the stock prices soaring in just the last several weeks, Sundial has taken the opportunity to raise capital, boosting the cash on its balance sheet. While this is helpful particularly as the company remains unprofitable, it comes at a cost to existing shareholders. The company's market capitalization has soared more than 1,200% since the start of 2021, while the stock price itself has gained about 720%. While both are huge numbers, the difference shows the dilution that existing shareholders have endured in the process. 

Tilray has had more fundamental reasons for its 2021 gains. This week, the company reported a new distribution agreement in the U.K. to go along with other European expansions recently announced. It also recently said it has exported its first medical cannabis shipment to Spain, and it has received the first and only market authorization for medical cannabis products in Portugal. In addition to the business expansion, Tilray has plans to combine with Aphria to form the largest global cannabis company by sales. Aphria CEO Irwin Simon will lead the newly combined company that will retain the Tilray name. 

OrganiGram shares have also more than tripled since the start of the year. It is the smallest of the three names with a market cap at just over $1 billion, and it is still unprofitable as well. Last month the company reported that its fiscal first-quarter 2021 net revenue from Canadian adult recreational use grew 30% compared with the prior-year period, though its overall net revenue dropped 23%. 

The retail trader fury from yesterday looks to be waning today, but there are still some things to like about the businesses, particularly if legalization continues to expand in the U.S. But investors should realize the dilution that has occurred to support Sundial Growers' balance sheet, and the struggle toward profitability that all are experiencing. Investors should focus on the underlying business, or dedicate any funds into the speculative portion of their portfolio.

This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.