At this time last year, Tilray (NASDAQ:TLRY) was headline news because it became the first cannabis company to be listed on NASDAQ. TLRY stock went public just in time to get caught up in the bubble that preceded Canada’s legalization of cannabis. Tilray stock hit the market at around $22 dollars per share in late July and by September, it actually traded above $300.
Since then, however, the long-term owners of Tilray stock have suffered badly. The stock has basically crashed and is now trading back near its IPO price.
There seems to have been good news about TLRY recently, though. It just reported its Q2 results, and its revenue was up about 370% versus the same period a year earlier. Additionally, it has made promising investments in the U.S. and Europe.
The Privateer Conundrum
In my opinion, Tilray stock is down due to a unique position that the company is facing. As a former institutional trader, I have some insights into this that most analysts don’t.
Privateer is a private-equity firm that was an early investor in Tilray stock. Private equity firms invest in companies in their early stages. They take a stake in companies and receive private shares. They hope that the companies will grow and eventually go public. When that happens, the private-equity firms will be able to sell their shares to the public at a much higher price than it acquired them for.
Privateer owns 75 million shares of TLRY stock. That is about 77% of the publicly available shares of Tilray stock.
Tilray and Privateer just announced that they signed a letter of intent to extend the restrictions on the sale of Tilray stock. Their deal also provides for an eventual orderly release of 75 million shares of TLRY stock. What does that mean?
It means that TLRY has 75 million shares of stock that it’s going to try to sell. That will be very difficult to do.
TLRY said the deal allows it to pursue investments from institutional and strategic investors. Consequently, it will be approaching institutional investors like hedge funds and pension funds and offering them a chance to buy the shares.
Here is the problem. Would you buy 1 million shares of a stock if you knew another 74 million were for sale and could potentially drive the stock price down? Or would you buy 10 million shares knowing that there are another 65 million out there for sale? Of course not. No institutional money manager wants to buy the first part of a large block of shares They want to buy the last part. Because of that, TLRY will probably have a difficult time finding buyers for TLRY stock.
Tilray could try to secretly sell the shares through dark pools, but if it sells more than 10% or 15% of the stock’s total volume each day, it will adversely affect the price of Tilray stock . About 1.5 million shares of TLRY trade on an average day. So if the company sells 150,000 shares per day, it will take 500 days or close to 18 months to sell the shares it needs to unload. But in reality, the company would have to announce that it was selling the shares, so secrecy is not an option.
So despite the recent good news, I would not buy TLRY stock. I believe that the large overhang of Tilray stock that the company must sell will cause the share price to go even lower.
A Look at TLRY Stock
As you can see by looking at the chart below, TLRY stock is almost back to where it was last July. Maybe it will find some support around the $22 level. That is where it bottomed.
At the time of this writing, Mark Putrino did not hold any positions in any of the aforementioned securities.