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Retail investors are piling into big-name cannabis companies such as Tilray Inc. and Canopy Growth Corp. all over again, forcing some analysts to throw in the towel on valuing the sector.

Shares of Tilray, which reported an operating loss of US$179-million over the first nine months of 2020, jumped 51 per cent Wednesday, on no news, while Canopy’s stock climbed 6.2 per cent a day after reporting another quarterly loss. The stock is now up 111 per cent year to date.

“Fundamental factors are moot in the current market, which is reminiscent of other euphoric times in the cannabis industry,” CIBC World Markets analyst John Zamparo wrote in a note to clients late Tuesday.

The cannabis comeback: Why Aphria’s shares tripled in one month - and the whole sector is booming. Again.

The power of retail investor enthusiasm has recently been associated with stocks such as GameStop Corp. and with messaging boards such as WallStreetBets on Reddit. But cannabis was arguably the original Reddit-fuelled sector. When marijuana stocks took off in early 2018, direct investing platforms run by major Canadian banks experienced widespread outages and glitches because of unprecedented retail trading volumes for cannabis shares.

Such traders appear to be rushing back to the sector, lighting up Reddit boards and increasing trading volatility. Shares of Aphria Inc. – which is set to merge with Tilray – jumped 34 per cent when the market opened, then gave back half those gains in a matter of minutes. The stock closed up 10.7 per cent.

The difference during the early stages of this rally is that investors have been more likely to buy shares of individual cannabis companies than the Horizons Marijuana Life Sciences Index ETF, which tracks the industry’s stocks. Through December and January, when the sector’s valuations started to take off again, the Horizons index saw net outflows, even as its value rose. (The amount of money invested in the ETF is distinct from the value of its underlying shares.)

The recent surge in enthusiasm makes the cannabis companies tough to value – at least according to traditional models. Shortly after Canopy reported a $829-million loss on Tuesday morning, CIBC’s Mr. Zamparo pointed out that even after applying an industry-leading enterprise value multiple of 12 times the company’s sales, he arrived at a $32 price target.

By day’s end, however, Canopy’s stock had jumped 12 per cent and he recalibrated his expectations, then doubled his price target to $64 a share. “Spurred by U.S. election outcomes, recent discussion of legalization by key lawmakers, and increased interest from retail investors, we recognize the potential for current conditions to fuel more near-term exuberance,” he wrote in a follow-up note to clients.

American day traders may also be behind the surge, since they don’t have many options for playing the market. Because recreational marijuana is still illegal at the federal level in the United States, many American companies are not publicly listed.

For this reason, many U.S. investors look to Canadian companies with U.S. or international exposure, and the likes of Tilray, Canopy and Aphria most often fit the bill – although the whole sector is soaring, with the Horizons index up 140 per cent year to date.

Canaccord Genuity analyst Matt Bottomley attributed the gains in the sector to a range of reasons in a note to clients late Tuesday.

“We believe the recent value appreciation has been more a function of positive macro-headlines coming out of the U.S. – Biden presidency; Democratic control of Senate; commitment to push U.S. cannabis reform at the federal level – that has resulted in a disproportionate amount of capital to flow into a number of leading Canadian licensed producers (perhaps due to their U.S. listings where many U.S.-domiciled operators are still not permitted to trade.),”

Despite those factors, Mr. Bottomley put a “sell” rating on Canopy’s stock.

While Canopy has the potential to expand in the U.S. if cannabis is ultimately legalized nationwide, right now it’s reliant on Canada – which is awash in oversupply.

“We note that Canopy currently has a market cap of approximately C$23.5-billion,” Mr. Bottomley wrote in his note, “which represents approximately 31 times next 12 months net revenue and 2.4 times our peak revenue forecasts for the Canadian industry as a whole.”

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