Plunging Tilray Stock Shows Just How Much Sentiment Has Changed

Once a bubble stock, TLRY is heading back to IPO level despite positive recent news

The trading in Tilray (NASDAQ:TLRY) stock has been jaw-dropping. Tilray stock went public just last July — the first cannabis company to list on a major U.S. exchange. The IPO price was $17. Within three months, the stock had closed at $214, with a brief intra-day run to $300.

Plunging Tilray Stock Shows Just How Much Sentiment Has Changed
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Thirteen months later, those gains are nearly all gone. Tilray stock closed Monday just above $20. To be sure, cannabis stocks have seen volatility over the past year, and nearly all of them have declined sharply of late. But none have had quite the highs — or the pullback — of TLRY.

The irony is that I still think Tilray stock is one of the more intriguing stocks in the category. The bubble last year — and it was a bubble — has given Tilray the reputation of a fly-by-night operator, or even something close to a “pump and dump.” That’s not the case.

Tilray’s long-term strategy, which is to focus not on production, but on products, makes some sense. And as I wrote after Tilray earnings in August, investors’ sudden interest in profitability is odd. Even Tilray CEO Brendan Kennedy noted it after the second-quarter release.

In fact, I called out TLRY as one of 10 mid-cap stocks to buy in late August. But as I noted at the time, patience was advised: The Tilray stock chart looked like a falling knife.

It still does — and that patience still is advised. TLRY, perhaps more than any other pot stock, shows just how much sentiment has changed and how much it will take to reverse it.

What Will It Take for TLRY Stock to Rally?

Over the last three months, TLRY stock has lost more than half of its value. And yet, in the context of cannabis investor expectations as recently as this summer, the news hardly seems all that grim.

Q2 earnings were fine. Yes, Tilray missed analyst expectations for profitability. But profits are not the endgame right now — positioning for cannabis growth is. Tilray’s solid revenue growth is up 371% year-over-year and nicely ahead of analyst estimates. That seemed like a step in the right direction. Investors agreed with that at the start of the year, when pot stocks like TLRY, Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) were rallying. That’s true no more.

Indeed, off what was at worst a decent quarter, Tilray stock fell 35% in four sessions. A big whiff at Canopy, which pressured the sector, certainly didn’t help. But in no way should the report have driven a 35% decline. And I’d argue that even six months earlier, the same report may well have been perceived as positive, not negative. Even Aphria (NYSE:APHA) has continued to decline despite what was clearly a blowout report. It’s hard to imagine what kind of earnings beat it would take to truly change investor sentiment.

Political Help, Right?

The last time cannabis stocks rallied was late last year. And a key catalyst for the rally was the passage of the Farm Bill, which legalized hemp in the U.S.

That new law was seen as a potential first step toward legalization in the U.S. — an obviously enormous opportunity for legal cannabis producers. And so the rally, admittedly off lows driven in part by a market-wide selloff, seemed to make some sense.

Late last month, the SAFE Banking Act passed the U.S. House of Representatives. The act allowed banks to legally work with cannabis companies in states where marijuana was legalized. The impact on cannabis stocks was minimal. TLRY stock gained 2.7% that day and the gains were erased in less than two sessions.

To be sure, the SAFE Banking Act isn’t necessarily going to become law. Indeed, it’s unlikely to pass the Republican-controlled Senate. But, here too, it’s not hard to imagine the reaction being very different last year or even earlier this year. It’s a step in the right direction for the sector, seemingly. But investors don’t care.

Anheuser-Busch Can’t Even Help Tilray Stock

Tilray announced that its joint venture with Anheuser-Busch InBev (NYSE:BUD) would commercialize non-alcoholic CBD beverages in Canada.

In 2018, such an announcement would have sent Tilray stock soaring. On Friday, the day following the after-close announcement, TLRY rose 1.5%. It had declined over 13% the day before.

Perhaps nothing for Tilray stock this year — and maybe nothing for the sector as a whole — further shows what a shift in sentiment there’s been in the past year or so. Tilray is taking a big step forward with a big-time partner toward a legitimate opportunity. And investors seemingly could not care less.

That’s a hugely dangerous problem for Tilray in the short term. But combined with the reputational impact of last year’s TLRY bubble, it’s also why the stock still seems intriguing — at some point. But there’s no need yet to try and figure out when that point might be.

As of this writing, Vince Martin has no positions in any securities mentioned.


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