The cannabis sector got a boost last week when Amazon (AMZN -0.16%) said it backs federal legislation in the U.S. to legalize marijuana. Canadian companies with aspirations to grow in a legal U.S. market also benefited. Some of these names have been moving thanks to interest from retail traders on social media, and it can be hard to tell whether or not they trade more on the potential for business fundamentals. Today, the direction is up, and three Canadian names are moving as follows as of 12:45 p.m. EDT:
- Sundial Growers (SNDL 0.70%) up 8.3%.
- Aurora Cannabis (ACB 0.77%) up 7.6%.
- OrganiGram Holdings (OGI -2.29%) up 5.5%.
Moves in these stocks can be attributed to retail traders by looking at different metrics. Besides having no company-specific news, sharp jumps in the 30-day average daily trading volume are a good clue. That recent bump has occurred in Sundial and Aurora shares.
Another focus of retail traders is short interest, as they attempt to band together and drive shares up until short-sellers have to cover, meaning buying back previously sold shares. All three of these cannabis stocks have a fairly high percentage of shares held short. As of mid-May, OrganiGram had 5.8% of its float held short, Aurora 18%, and Sundial 24%, according to MarketWatch.
So while it's apparent that some cannabis stocks (especially Sundial and Aurora) appear to be moving thanks mostly to the WallStreetBets crowd, there are more-fundamental factors that have attracted investors recently.
U.S. states continue to pass legislation decriminalizing or legalizing marijuana for various uses. Most recently, traditionally conservative Alabama became the 37th state to legalize medical marijuana. And adding to legalization fever is retail giant Amazon saying it will stop screening certain employees for marijuana, depending on job requirements.
Investors should still focus mostly on the fundamentals in addition to speculating on a large new market in the U.S. But there is some bad news on that front. In its first-quarter financials reported last month, Sundial said gross revenue dropped 30% sequentially compared to the fourth quarter of 2020, and a similar amount versus the year-ago first quarter. One of the main headwinds for the company was a lower product selling price. In its earnings conference call, Sundial CFO Jim Keough explained that the average gross selling price of branded products dropped 24% compared to the previous quarter, "reflecting the industry price compression and a consumer shift to value products."
That's what longer-term cannabis investors should be focused on. The popularity of the stocks on social media will wane. What's left will be the underlying business. Whether it's from improving prices in their home market or growth into new ones, that has to improve for these companies to have long-term success.