Even Marijuana Bulls Are Becoming Skeptical Of US-Listed Cannabis Stock Prices

Cannabis stocks were again smoking Wednesday after Cronos Group Inc CRON announced a partnership with Ginkgo Bioworks before to produce cannabinoids at scale.

Analysts are optimistic about the future for the marijuana industry, but even cannabis bulls are increasingly skeptical of market valuations after yet another big day of gains in weed stocks.

More Good News

Cannabinoids are the molecules in marijuana that impact the human brain, including THC and CBD.

“The potential uses of cannabinoids are vast, but the key to successfully bringing cannabinoid-based products to market is in creating reliable, consistent, and scalable production of a full spectrum of cannabinoids, not just THC and CBD,” Cronos Chief Executive Mike Gorenstein said in a statement.

Tilray Inc TLRY traded higher by 18.1 percent and Canopy Growth Corp CGC traded higher by 2.7 percent on Wednesday.

Brochstein’s Take

New Cannabis Ventures founding partner and 420 Investor author Alan Brochstein joined Benzinga's PreMarket Prep show Wednesday to discuss the valuations of marijuana stocks and the implications of the latest news.

Marijuana stocks are getting ahead of themselves, he said.

“I’ve been kind of amazed by this. If you would have told me that Tilray was going to be testing $80, $90 or $100, I would have laughed,” Brochstein said.

“Here’s the reality: all of a sudden it's OK for U.S. investors to invest in [marijuana] stocks, but they have a very limited pool that trade on the Nasdaq and the New York Stock Exchange."

The three stocks mentioned above are serving as proxies for U.S. traders for the entire Canadian marijuana industry, Brochstein said. The recent trading action isn't reflective of business fundamentals — but that doesn’t mean the fundamentals aren’t improving dramatically, he said.

“There is a positive fundamental story going on, it’s just hard to tie the valuation into where we are right now."

Proceed With Caution

For now, Brochstein urged investors to be careful with the three stocks.

“There’s a short squeeze going on. Tilray especially has a tight float,” he said. "By my count, more than 100 percent of the float traded yesterday. It’s been hijacked by the traders.”

The Canadian legalization coming Oct. 17 may not be the big near-term catalyst that traders are hoping for, Brochstein said.

“There’s not a lot of supply. The inventories just aren’t there to support robust sales from day one,” he said. “More importantly, there’s not a lot of distribution.”

Citron’s Bold Prediction

Brochstein isn’t the only one skeptical of Tilray’s valuation.

Citron’s Andrew Left told Benzinga on Wednesday that he still expects Tilray will opt for a secondary offering in the near future.

“A secondary does not make them a bad company,” Left said. “They are taking advantage of a market that is giving them a premium that obviously they believe is unwarranted.”

Last week, Citron accused Cronos management of deceiving its investors by not disclosing the size of its distribution agreements with Canadian provinces. The company responded that Citron's report was flawed, "with numerous misleading and inaccurate statements."

Citron set a $3.50 price target, suggesting roughly 70-percent downside for Cronos. After an initial sell-off, Cronos stock has since recovered and is now up 1.1 percent since the Citron report.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.

Related Links:

Cannabis Stocks Remain Hot, But Might Be Getting Overheated

Cronos Group Plummets After Citron Calls It The 'Dark Side Of Cannabis'