Cannabis stocks are smoking hot right now.
Investors everywhere are fascinated by the volatility in these names. Announcements continue to drive large share price moves. Some bullish momentum investors are looking to cash in on this trade. Other trades such as Bitcoin and big tech continue to outperform, so playing the hype has worked out well for many.
In the cannabis sector, there’s one proposed merger which has taken up much of the headline space of late.
The deal everyone’s talking about
Last Wednesday, Tilray (NASDAQ:TLRY) and Aphria (NASDAQ:APHA) announced they would merge – a merger that would result in a combined entity with trailing revenue of $874 million. The company also announced a plan to cut costs by $100 million a year. This comes as the sector has come under scrutiny for overspending amid demand that has not materialized as expected.
As fellow Fool contributor David Jagielski covered in his recent piece, this deal indeed will result in a seismic shift in the cannabis sector. The combined entity will become a juggernaut in the sector, making this alliance the largest Canadian cannabis producer.
While the new Tilray will still be smaller than other U.S. competitors, size does apparently matter in this sectors. Investors have applauded the move, with both companies’ share prices increasing immediately on news of the merger.
However, these increases have been pared in recent days, as some of the optimism has worn off.
What happened?
Some investors may be spooked by the fact that a deal between Aphria and Aurora Cannabis fell apart earlier this year.
Other investors may still be wary of the ability of the combined entity to generate the combined cost savings set out in the agreement.
Still other investors may be concerned with the lack of impressive growth, which was expected as a result of 2018 legalization.
Whatever the case is, shares are trading to the downside as we speak, and investors ought to remain cautious with these trades.
What does the future hold?
As I’ve stated previously in a number of articles, this sector is a dangerous one to invest in. The volatility we’ve seen in the share prices of these companies is only likely to continue. Investor demand that is driven off of headlines and speculation remains cautious. That is saying something, as the fear-greed index has recently approached extreme greed levels in recent weeks.
Those looking to make a quick buck could get burned badly by these hot stocks. My recommendation to Foolish readers is to avoid the hype and stick to fundamental long-term buy-and-hold investing strategies.
Here are some other stocks to consider…
