Pot stocks are back in style. After a rough finish to 2018, marijuana shares are surging. The leading industry fund, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is up 3% on Friday and closed last week out 13% higher. With the market looking healthier and 2018 tax loss selling finished, traders are back and they’re gravitating to the pot stocks.
Tilray (NASDAQ:TLRY) has been arguably the biggest beneficiary. TLRY stock rallied as much as 27% intraday Friday (finishing the trading day up near-20%). That caps an amazing week, which saw Tilray move from $70 to $96, a 37% five-day move! TLRY stock had already been trading higher throughout the week, but Friday’s short squeeze took things to another level.
This brings up a most fascinating situation heading into Jan. 15. On that day, the initial public offering (IPO) lock-up expiry ends, allowing close to 60 million Tilray shares to start trading.
Bears have bet the farm that TLRY stock will collapse once these new shares hit the market. However, the major Tilray stock owner may have other plans.
Privateer Goes to War With the Bears
Privateer Holdings Inc., the first and largest private equity fund devoted solely to cannabis, set off Friday’s explosive rally. Privateer put out a press release stating its intentions for its TLRY stock holding.
For those unaware, Privateer has a gigantic position in Tilray stock, owning 75 million shares. At a $96 TLRY stock price, that is a $7.2 billion holding. The company has 94 million shares outstanding. Thus, Privateer controls roughly 80% of all TLRY stock currently in existence.
Considering this, it’s of utmost importance what Privateer decides to do with its Tilray stock holding once it unlocks on Tuesday. On the one hand, there is no way Privateer could sell a major portion of its holdings without causing a substantial decline in Tilray’s stock price. On the other hand, if Privateer decides to hold on, it leaves the public trading just a tiny fraction of Tilray’s outstanding shares.
Privateer has, apparently, elected the latter option. They put out a press release Friday stating in part that:
“[W]e do not have plans to register, sell or distribute the shares Privateer holds in Tilray during the first half of 2019. When we decide to distribute shares, we will do so in an orderly and deliberate manner to maximize tax-efficiency considerations for Privateer investors, while also taking into consideration potential impacts on Tilray’s public float.”
This is a huge piece of news. If Privateer is true to their word, it means that 80% of Tilray’s stock will remain off the market through the end of June. Short sellers have a bearish position of 3.9 million shares of TLRY stock as of Dec. 31st, 2018. With Privateer out of the picture, there are less than 19 million shares available to the public, leaving short sellers controlling a huge position of the scarcely available stock.
Massive Short Squeeze Potential
As we saw on Friday, this huge short position makes TLRY stock bears extremely vulnerable. In the event of any sort of good news, you’ll see people who are short millions of shares of Tilray fighting to buy the stock first before it runs up even more. As long as Privateer stays true to their word and doesn’t dump Tilray stock, there simply aren’t enough shares to go around and meet demand.
We saw this same effect late last summer.
TLRY stock went from as low as $25 in August to as high as $300 in September. In one extraordinary day, Tilray shares went from $160 up to $300.
Short sellers have seemingly been overconfident with Tilray stock. With its $10 billion market cap, it’s easy to think the stock is too big to squeeze like that. But with Privateer controlling almost all the outstanding shares, Tilray is subject to unusually large price swings.
Why Doesn’t Privateer Cash Out?
You might be asking yourself why Privateer doesn’t take advantage of the upcoming lock-up expiration and start dumping stock at around five times the IPO price. It’s a great question. However, in this case, there are some interesting incentives for Privateer to hold onto its stock longer.
For one thing, there’s an unusual related-party matter at work in this case. Tilray CEO Brendan Kennedy also just happens to be the Executive Chairman of Privateer. As the CEO of Tilray, Mr. Kennedy has plenty of motivation for the stock price to remain elevated. Stocks function as currency; a high share price will allow Tilray to acquire competitors with its highly-priced paper. Additionally, if Tilray needs more cash, selling stock up here at $100/share is a great way to raise money.
Kennedy has another angle here as well. Last September, he was granted call options on more than 300,000 shares of TLRY stock that exercise at $65. He can’t start to profit from these until they vest this summer. Thus, he has strong personal incentives to try to keep Tilray stock well north of $65 for at least the next six months.
Additionally, Privateer is probably making a fortune from short sellers. Short sellers have to pay a so-called rebate to borrow stock from its owners. Normally this is a nominal fee, a couple percent or less. Recently, however, this has surged to 500% or more annually for TLRY stock.
Take a second to think about that … A short seller is paying 500% per year, 40% per month, otherwise stated as more than 1% per day, to stay short Tilray. The stock needs to collapse, and pretty much immediately, for short sellers to get paid.
Who collects those borrow fees? Generally, they are split between the stock owner and their brokerage or investment bank. If Privateer is lending their shares, they are making a killing right now collecting fees from short sellers.
TLRY Stock: Risky but Probably Going Higher
Tilray stock is a war zone right now. On Friday, bulls rampaged ahead. Next week, the bears are hoping to get their revenge, and they very well might.
There seems to be nothing legally binding about Privateer’s statement. They could decide to start unloading Tilray stock anyway, defusing the short squeeze while taking profits.
However, several different reasons suggest that Privateer does intend to keep the pressure on the bears in coming weeks. Insiders have understandable motivation to try to keep Tilray stock above $100 even with the lock-up expiry ending.
This is a highly speculative stock, so be careful. But for the moment, bulls should expect the upward momentum to continue in coming days.
At the time of this writing, Ian Bezek owned TLRY stock. You can reach him on Twitter at @irbezek.