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21st of October 2018

Economy



Weed stocks like Tilray are soaring — but could it be the new Bitcoin bubble?

Canadian cannabis producer Tilray Inc. has had a record-breaking week on the stock market, with shares surging 94 per cent on Wednesday.

The daily percentage gains of pot stocks have even surpassed giant players in the market like Microsoft, Facebook and Exxon Mobil.

READ MORE: Canadian producer Tilray to export medical cannabis to U.S. for clinical trial

Tilray, which completed its initial public offering on the Nasdaq in July with shares priced at US$17, earlier this week said it got approval to export medical cannabis to the U.S. for a clinical trial.

Since the news, the Nanaimo, B.C.-based weed producer’s stocks have skyrocketed. It closed at US$214.06 on Wednesday, after trading as high as US$300.

WATCH: How to buy weed in Canada when it’s legalized

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Tilray’s market valuation reached more than US$19 billion Wednesday (the total dollar amount of a company’s outstanding shares). To put this in perspective, this put Tilray’s U.S. market value ahead of brewer Molson Coors, casino operator Wynn Resorts and American Airlines.

Tilray’s wild ride on the stock market is reminiscent of the bitcoin crazy last year and even the height of the dot-com bubble at the turn of the century.

So what is causing the weed stock to skyrocket, and will it crash and burn like Bitcoin did earlier this year?

View link » Why are cannabis shares, like Tilray, on fire?

Tilray’s announcement came ahead of other great news in the cannabis industry. In August, Constellation Brands, which makes beers like Corona and Negro Modelo, invested $4 billion in Ontario pot producer Canopy Growth.

On Monday, BNN Bloomberg reported the company was in talks with B.C.-based marijuana producer, Aurora Cannabis, to make CBD-infused wellness drinks. However, Aurora has since said it has not signed a deal but is in conversation with beverage makers.

READ MORE: Canadian weed stocks are skyrocketing as legalization looms — but should you invest?

This caused Tilray, Canopy Growth and Aurora’s stocks to rise.

Scarcity could be another factor for Tilray’s growth, according to Greg Taylor, a portfolio manager with Toronto-based Purpose Investments.

“Once Canopy did a deal with Constellation Brands, it validated the cannabis space. A lot of global investors all of a sudden woke up,” he said.

“Tilray was the first company to do direct investment on Nasdaq — so for U.S. investors, way easier to buy stock.”

But the new cannabis industry has a lot of “space in the market” that investors are still not playing in. A lot of banks are not allowed to invest in weed stocks, so mutual funds can’t invest.

Instead, hedge fund and retail investors are eyeing cannabis stocks. But Taylor warns, this can create a lot of volatility in the market.

WATCH: Is Canada ready for marijuana legalization on Oct. 17?

Is Tilray similar to the Bitcoin craze?

The interest in investing in cannabis is similar to the cryptocurrency craze  — a new market fueling speculation and potential quick gains.

“It’s almost like everyone wanted to express their fear and greed through one entity,” Michael Antonelli, an institutional equity sales trader and managing director, told the Seattle Times. “It’s fun to watch. It’s the Wild West right now for cannabis. It isn’t the kind of thing that institutions would touch.”

READ MORE: Remember how Bitcoin’s value soared in 2017? Most of it was market manipulation, study says

Companies that rebranded with crypto or blockchain in their name last year saw big gains in their share prices, as many investors were quick to buy into the craze. However, the popularity was short-lived and many stocks plummeted with the Bitcoin bubble burst.

Bitcoin’s value reached an all-time high of nearly US$20,000 per coin at the end of 2017, but its value came crashing back down in the new year and it continued the steady spiral.

Will cannabis stocks follow suit?

Bitcoin: hot investment opportunity or looming bubble?

“Bitcoin was tricker because the craze was about new technology. It was in an even more earlier stage and people were excited. But this technology is still years away and Bitcoin’s impact is still unknown,” Taylor said.

He said because cannabis is so close to legalization (Oct. 17 in Canada) there will be companies and brands that will develop, making it more tangible than cryptocurrency.

READ MORE: Canada could be a leader in the global cannabis market — if the rules loosen up: experts

“But it’s still going to be too early who is going to win in this market,” he said.

More like the’dot-com bubble’

Taylor said the Tilray-led cannabis investing craze may be more like the dot-com bubble of the late 1990s and turn of the century. This was also a period of massive speculation in the growth and usage of the internet.

Investors were eager to invest in companies that had internet-related names in the title (such as .com), which made stock prices rise and a bubble to form in the market.

WATCH: How to invest in a volatile stock market

But in the early 2000s, many dot-com companies ran out of capital and the bubble burst. Some companies survived, like eBay and Amazon, while others died (Geocities, Altavista and Boo.com).

Taylor said this is what may happen with the cannabis industry.

“There was a lot of excitement in ’90s as internet companies were just getting started. And at the end of the day, that hype was justified as we got Apple and Google … and have a lot of global leaders out of the race,” he said. “But not every company won. So with cannabis, there will be great companies coming out of it but not everyone will win.”

READ MORE: Here’s everything to know about cannabis-infused drinks

So what cannabis company will be the next Amazon?

Taylor said it’s still too early to tell.

“It hasn’t even rolled out in Canada yet, let alone Europe or the U.S.,” he said. “Some of these companies, like Tilray, look like their winning now. But it’s still way too early to make that decision.”

Should you invest in pot?

Taylor said the cannabis industry could get messy after legalization.

This is because some provinces are still not ready. Ontario has already delayed the launch of its cannabis retail stores and B.C. is also pushing back on the deadline, Taylor said.

“So cannabis companies may miss quarters,” he said.

WATCH: Legalizing marijuana in Canada means big business for weed

However, Taylor said after legalization it may be a good time for investors to start researching. Right now cannabis stocks are flourishing because of “hype” but there isn’t any cash flowing in, so it’s tricky to know how well the company will do.

“But in six months to a year from now, they will be a real company with CFOs and operating costs. This will be the time to find out who is winning. This is a commodity at the end of the day and they need to create a brand if they want to win.”

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