Shares of cannabis stock Tilray (NASDAQ:TLRY) certainly have had a wild ride since coming public last July at $20. TLRY stock traded all the way up to $300 before crashing back to earth. While the stock is well off those euphoric highs, it still has farther to fall following an earnings report that had more questions than answers.
Tilray reported earnings Monday, with the company, as expected, reporting a net loss of 33 cents per share. Gross margins fell sharply from 57% to 20% due to the need for third-party procurement. Revenue for the fourth quarter came in at $15.5 million and for full year 2018 of $43.1 million — for a company with a market cap approaching $7 billion dollars!!
While I am a believer that the cannabis industry is still in high-growth mode, valuing a stock with less than $50 million in current annual sales at nearly $7 billion is beyond ludricrous, in my opinion.
Growth stocks such as TLRY trade more on technicals and momentum rather than fundamentals. The price action seen yesterday in Tilray stock post earnings is very emblematic of a short term top. Shares opened higher and on the highs of the day only to falter and close lower and on the lows of the day.
This was also an outside reversal day (or bearish engulfing pattern) , occuring when the high and low prices for the day exceed the high and low of the previous trading session. It shows that the bears have taken control from the bulls and signals a shift in overall psyche.
Click to EnlargeImplied volatility (IV) crashed following earnings and is now at the nearly the lowest readings ever. This is another bearish sign that complacency may be a little too high. Tilray stock remains difficult, if not impossible, to borrow to go short the stock outright.
The options market provides an alternative way to take a guarded short position, however.
Tilray Stock Trade Idea
Sell TLRY June $85 calls and buy TLRY June $90 calls for a 70-cent net credit.
Maximum gain on the trade is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.27%. The short $85 strike price provides a 21.79% upside cushion to the $69.79 Tuesday closing price of TLRY stock.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatili
