In a sign that things are getting just a wee bit ridiculous, Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) topped Cowen & Co.’s revised price target of $74/share CAD in just one session. Technically, it’s one session and ten minutes, as Canopy Growth printed $74.45/share just after 9:40 am this morning. But who’s really counting at this point?
Such anomalies are the surest signs yet that the cannabis market has lost all sanity. Keep in mind that Cowen & Co. had already raised its price target significantly following Canopy’s deal with Constellation Brands Inc., and that yesterday’s new target was based on “WEED’s ability to establish an early lead in the adult use cannabis market, as well as domestic and international medical cannabis markets.” Well, color me surprised if this doesn’t win obvious analyst statement of the year award.
Perhaps recognizing the extreme optimism baked into the cake, Canopy Growth underwent a violent gap-reversal at the beginning of trade this morning. After gaping up ↑9.50% this morning, the stock took a nasty tumble which reeked of an organized algo stop hunt. The price careened from $74.45/share to a low of $64.20 (↓13.77%) in less than thirty minutes! This appeared to be safety valve selling, as the stock’s (and sector’s) inner piping had collected too much steam.
Another huge part of the FOMO insanity gripping the market resides with Tilray Inc.—In fact, I would argue that it’s Tilray which is most responsible for the extreme euphoria driving the market at this particular juncture. After gaping up another ↑11.94% this morning, it too took a similarly nasty tumble off the opening bell. As I type, prices are making a strong recovery, and most of the selling happened on below trend volume. The lack of follow-through gives hope that the safety valve selling was just a momentary blip to a rally which hasn’t quite run its course.
Although Tilray’s valuation already makes zero sense from any fundamental or forward-looking perspective, calling tops based on valuation alone is a very dangerous endeavor in a FOMO-type environment in combined with a tight share structure—as Citron Research found out this morning. We would not be surprised to see $100/share being topped before the inevitable capital raise takes place.
With Canopy Growth topping Cowen & Co.’s revised price target in just one session, the euphoria driving the market is probably entering the final stages. Such reactions on essentially nothingburgers generally only occur when investors aren’t thinking straight. Any news becomes justification to send prices soaring by unjustifiable amounts. In my opinion, Canopy’s unbelievable strength doesn’t occur to this degree if Tilray’s price action was more subdued. While both stock are equally reflective of U.S. retail/institutional money diving in indiscriminately, it appears that Tilray is the tail wagging the dog at the present time.
With Tilray holding serve above $83/share as I type, don’t discount another impressive sector run today. Some of the most dramatic move frequently occur right at the end of late-stage cyclical bull markets. The Midas Letter will be closely monitoring whether this morning’s selloff was the short term jump-off point, or simply a reloading point for another run higher. Right now, it looks like the latter. Stay tuned.
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