News Fix: Pent-Up Demand Driving Interest in Cannabis Stocks

There’s a lot of “harrumphing” about cannabis stocks right now. The Los Angeles Times had this grumpy headline: “Tilray’s wild ride shows how hyped pot stocks are catching up to the crypto craze.”

Bloomberg said “hold my beer” and added this headline to the mix: “It’s Official – Cannabis Is the New Crypto.” And in an email newsletter from Bloomberg, there was this nugget:

Andrew Kessner, an analyst at William O’Neil & Co., is overall bullish on the space and sees a legal cannabis market across North America worth about $40 billion in 2025. The country’s three biggest marijuana stocks (Tilray, Canopy and Cronos) already have a market cap of about $40 billion. In other words, three stocks are worth the same as the expected entire North American market seven years out… The trouble is, you can call this market overly exuberant if you like, but that won’t stop you from getting wrecked if you’re short – or feeling major FOMO pangs if someone you know has already made a fortune buying calls on Tilray.

Bloomberg does have a point. These valuations are pretty incredible. And Tilray’s ride this week has been incredible. It started the week trading around $117. As of this writing near the end of the week, it’s trading at $126.51. But in between? It traded at a high of $263.34 and saw trading suspended five times in one day because of volatility concerns.

There are lots of reasons behind the Tilray roller-coaster ride. News that the Canadian marijuana producer landed a contract to supply key cannabis compounds for a small medical marijuana test in San Diego sparked Tilray’s surge (AP via Seattle Times).

Then there’s the fact that there just aren’t that many Tilray shares to trade. Tilray has about 17.8 million available shares to trade right now (MarketWatch). (More on that in a moment.) That’s tiny in comparison to its fellow pot stocks. Canopy Growth has 195.48 million shares available for trading. Cronos Group has 196 million shares available for trading. And Aurora Cannabis has about 912 million shares available to trade.

More Tilray shares will come on the market when the lockout periods for its founders and early investors – like Peter Thiel’s venture capital fund Privateer Holdings – end. Privateer owns about 75 million shares of Tilray.

But the lack of available shares is only a small part of the story. The big story – the one the financial press seems determined to miss – is that the sudden growth in pot stocks is all about supply and demand. There is pent-up demand for cannabis investment opportunities. And in the United States, there’s an incredible lack of supply. Tilray (Nasdaq), Cronos Group (Nasdaq), Canopy Growth (NYSE) and Aurora Cannabis (expected to launch on Nasdaq in October) are the only ones available on major exchanges.

Cannabis is an interesting industry where the people who use its products and believe in it also want to invest in it. That’s a massive investor community just waiting to fund businesses. And there’s nowhere for that money to go right now. That’s the real story behind why pot stocks are hot right now.

And we’re on the hunt for the investment opportunities out there. A bunch of you emailed us your best picks. We’re looking into them and doing our research now. We’ll keep you posted.

Now on to the News Fix!

Fidelity Joins the Game

We’ve been talking about institutional investors lining up to enter the crypto market for a while at Early Investing. More proof that this is happening arrived recently, when Fidelity confirmed it was developing its own crypto offering for investors. The CEO of Fidelity, Abigail Johnson, declined to offer more details than that in a speech in Boston. But she indicated Fidelity’s entrance into the market was a matter of timing as much as anything else. The boom is coming (Ethereum World News).

New York Unhappy With Three Crypto Exchanges

New York Attorney General Barbara Underwood has asked the state’s Department of Financial Services to investigate three cryptocurrency exchanges – Binance, Kraken and Gate.io. Underwood suggested that the exchanges may not be providing the level of transparency needed to comply with state cryptocurrency laws (Bloomberg).

It should come as no surprise that these exchanges declined to cooperate with Underwood’s investigation into market manipulation and fraud in the crypto markets. Nine other exchanges did cooperate – and they’re not being probed now.

And Finally…

SEC Commissioner Hester Peirce seems to enjoy the “CryptoMom” moniker crypto enthusiasts have given her for her fierce and passionate arguments that bitcoin ETFs should be given regulatory approval. In a speech to the Cato Institute’s Fintech Unbound conference, she links her preferred parenting style – free-range – to the way the SEC should be regulating the crypto space (SEC). It’s a fun and fascinating read. At the very least, it will make you smile.

And that’s your News Fix!

Have a great weekend.

Vin Narayanan
Senior Managing Editor, Early Investing