The Internet boom certainly provides a pretty good metaphor for what’s been happening to the cannabis space. In the early phases, the optimism was contagious (remember how adding a .com to a company name could greatly boost the stock value?). But markets can only propel the bullishness for so long. Eventually, there is a plunge, which can be brutal.
Unfortunately, when it comes cannabis stocks, we’re in this stage right now.
Now ultimately, I think there will be some huge winners – and yes, many operators that will simply be consolidated or go bust. This will accelerate as it gets more difficult to raise money.
So which cannabis stocks to focus on? Which ones will be the long-term winners? Well, Tilray (NASDAQ:TLRY) stock looks interesting. True, I have been negative on the company for some time. But given the much more attractive valuation, TLRY stock should get some consideration for a buy.
The company has the advantage of having raised substantial amounts when the markets were bubbly (this was done primarily with convertible securities, which will likely not be turned into stock any time soon).
Tilray also has diverse revenue sources, which span adult-use cannabis, food products and medical treatments. Oh, and it has been fairly disciplined with its spending and mergers and acquisitions deal-making: just take a look at its acquisition for Manitoba Harvest, which has been a nice catalyst for growth.
Negative Sentiment Is Off the Charts
Keep in mind that – for the most part – it’s hard to find many cannabis bulls anymore. Besides, when scanning through the headlines, it seems that a majority of analysts are negative.
To get a sense of how extreme things are, look at what happened this week with the announcement of preliminary fourth-quarter earnings from HEXO (NYSE:HEXO). Unfortunately, it fell significantly below expectations (which, by the way, were already depressed).
The company’s Q4 forecast now calls for a range of 14.5 million CAD to 16.5 million CAD. As for the analysts’ consensus, it was a much more robust $24.8 million. HEXO even withdrew its outlook for fiscal 2020 (it had previously forecasted revenues of 46.5 million CAD to 48.5 million CAD).
On the news, the stock sunk by more than 22%. Investors also sold off many of the other top names in the sector. For example, Tilray stock dropped over 13% to $20.65, putting the year-to-date return at a miserable -71%. In fact, TLRY stock is not far off from its $17 initial public offering price (the company went public in July 2018).
But there are really few signs of serious deterioration of Tilray’s business. In the latest quarter, revenues soared by 371% to close to $46 million.
True, the company continues to lose money. But this is expected as it needs to scale operations to keep up the growth ramp.
Bottom Line on Tilray Stock
Of course, predicting a bottom is a dangerous business! After a major boom, the plunge can easily go to the extreme.
So, with Tilray stock, it’s probably best to average into a position, as the volatility will likely continue. What’s more, there are a handful of other top-tier cannabis stocks, like Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC), that are worth considering as well.
Again, as with the dot-com implosion that happened nearly 20 years ago, the best strategy then was to focus on the major brands like eBay (NASDAQ:EBAY) and Amazon.com (NASDAQ:AMZN). And I think the same is likely to be the case with today’s cannabis stocks.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.