You can never take anything for granted in the legal-cannabis sector, and Tilray (NASDAQ:TLRY) offered the latest cautionary tale. After several trading sessions stabilizing around the $100 level suggested relative normalization, Tilray stock entered a full-blown meltdown. Since the start of the week, TLRY has hemorrhaged over 25% of market value.
What is going on here? All eyes are focused on cannabis competitor Aphria (NYSE:APHA). Earlier this month, APHA shares slumped badly as the cheekily named Hindenburg Research published a damning report on the company. Hindenburg, a short-selling specialist if you couldn’t tell from its name, alleged that Aphria is a “shell game with a cannabis business on the side.”
As expected, the short-seller critiqued Aphria’s financial metrics, including its consistently negative cash flow. Moreover, Hindenburg impugned the cannabis firm’s product quality, which is a major no-no. Marijuana consumer research indicates that buyers are willing to pay higher prices for quality weed.
But here’s the most troubling allegation: Aphria deliberately bought out companies at inflated prices. That alone isn’t necessarily damaging, but perhaps foolish. However, the report states that APHA execs owned shares of the targeted companies. That’s another big no-no, but from a serious legal standpoint.
Immediately, this news weighed heavily on the cannabis sector, including Tilray stock. Although Tilray is not directly involved in the Aphria scandal, it suffers from guilt by association.
In addition, Tilray has international ambitions. A focal point in Hindenburg’s investigation is that Aphria’s Latin American acquisitions are “largely worthless.” Since marijuana already has a “wild west” reputation, this accusation did no favors for TLRY stock.
Finally, Tilray stock bore the brunt of the damage because of its smaller float of available shares. As more analysts hop on the bearish bandwagon, TLRY suffers significantly.
Tilray Stock Now Screams Contrarian Buy
Admittedly, this latest scandal is at best a distraction that marijuana companies don’t need. At worst…well, we’re seeing the impact right now. Non-scandal plagued investments like TLRY stock suffer a disproportionate burden.
At the same time, I must emphasize this point: Without the Aphria controversy, no fundamental justification for the volatility in TRLY stock exists. As a result, I view these deflated prices as a classic contrarian setup.
Now, don’t get me wrong: I’m not suggesting that you mortgage your home to go all-in on Tilray stock. But let’s consider the Tilray-specific news. A substantial breakthrough is the company’s newly created international advisory board. Most notably, this board includes two respected power brokers from opposite sides of the political spectrum: former Democratic National Committee Chairman Howard Dean and former Republican National Chairman Michael Steele.
For the conservative Steele, this move trails fellow Republican and former House Speaker John Boehner’s footsteps. Earlier this year, Boehner generated headlines when he joined Acreage Holding’s advisory board, essentially becoming the new face of marijuana. This unexpected swing demonstrates that conservative opposition to legalized cannabis is thawing.
Furthermore, weed is the one area where we can find robust — and willing — consensus. If Trump and the Republicans wish to avoid a critical setback in 2020, they most likely must reconsider marijuana’s Schedule I classification. Naturally, a thawing in federal law would skyrocket Tilray stock.
Let’s also not overlook why TLRY created an international advisory board. The company enjoys significant credibility, winning groundbreaking approval from the Drug Enforcement Administration to export weed to the U.S. for medical research.
Directing this momentum to other countries is only natural. More importantly, worldwide sentiment for legalized marijuana to varying degrees is conspicuously shifting favorably.
Short-Sellers Have Motives, Too!
Finally, I’d like to make a closing point about the APHA controversy. It’s important to note that Aphria has quickly and strongly denied Hindenburg’s allegations. While that’s an expected response, it also demonstrates that short-sellers have their own profit-seeking motivations.
Thus, no one can say that the APHA analysis is purely objective, especially when you can bank money on the market-moving allegations. Let’s also bring up one key fact: This is not the first time that short-sellers have blasted marijuana firms for trading purposes.
Recall that Citron Research came out with a hit job on Cronos Group (NASDAQ:CRON) in late August. Their report called for a price target of $3.50, noting that Cronos represents marijuana’s “dark side.” Apparently, tobacco giant Altria Group (NYSE:MO) failed to get the memo. At the time of this writing, CRON stock is trading 225% above Citron’s negative forecast.
I mention this because while Aphria may not have credibility, the short-sellers aren’t rich in the stuff either. And ultimately, what does this have to do with TLRY stock? Aside from sector association, I argue absolutely nothing.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.