Cannabis stocks have taken a beating, and Tilray (NASDAQ:TLRY) stock has been one of the hardest-hit. Canadian sales growth hasn’t taken off like many investors had hoped. TLRY stock is down over 80% over the past 12 months.
Like other cannabis stocks, Tilray will face significant headwinds in the next couple of quarters. In fact, the bottom may not be in for Tilray stock just yet. But at the same time, traders should be extremely careful shorting TLRY stock at this point. There are several reasons why Tilray may be the most dangerous cannabis short of all.
TLRY Fundamental Picture
It’s easy to look at a stock that’s down more than 80% in a year and assume something is wrong with the company. A year ago, TLRY stock was trading above $110 per share, and now it’s trading at around $22. But the simple truth for Tilray stock is that it never had any business at $110 to begin with.
“Both Tilray and Beyond Meat are real companies, not frauds, in exciting sectors that are sure to see tremendous growth,” Tilson said. “But trading at over 100 times trailing revenues, their stocks were or are caught up in obvious bubbles.”
Tilray’s bubble has now mostly deflated. In fact, Morningstar analyst Kristoffer Inton says TLRY stock finally offers long-term investors a compelling valuation. Morningstar is forecasting 20% long-term annual revenue growth for the Canadian cannabis stock group.
Tilray has pivoted its model from being 90% exposed to medical cannabis to medical accounting for only about 33% of revenue. Cannabis balance sheets will be challenged in coming quarters as companies invest in scaling up their businesses. However, Tilray management is planning to be an asset-light company that is consumer-focused, Inton says.
In addition, Tilray already has a partnership with deep-pocketed Anheuser Busch Inbev (NYSE:BUD). Anheuser Busch provides Tilray access to the U.S. CBD market as well as a potential source of capital if needed.
Most importantly, TLRY stock is now trading at just over 5 times its guidance for 2020 revenue. It’s not necessarily a value stock at this point, but it’s much better than 100 times revenue. Morningstar has a “buy” rating and $40 price target for TLRY stock.
The Danger in Shorting Tilray Stock
Even if you believe TLRY stock is still overvalued and has a bit more downside ahead, think twice about shorting. According to S3 Partners, TLRY stock currently has the third-most expensive borrow fee of any stock at 62.1%. Stock borrow fee is the annualized fee short sellers pay brokers to borrow shares of stock. In other words, if a short seller holds a position in TLRY stock for one year and the stock price stays exactly the same, the short seller will be down 62.1% at the current rate.
In addition to high borrow fees, Tilray has a total outstanding short position worth $177.7 million. That short position represents 37.5% of Tilray’s float. As of the end of September, Tilray was the only major cannabis stock with a short percent of float above 27%, and it has only crept higher in October.
For now, there are no signs a potential short squeeze is imminent in TLRY stock. However, at some point, the cannabis market will make a turn. Whether that time is days, weeks or months from now, short sellers don’t want to be in Tilray when it happens.
“If stock prices rebound and cannabis sector short sellers get back into the red, short squeeze possibilities are back on the table,” S3 analyst Ihor Dusaniwsky says.
How to Play TLRY Stock
I get why Tilray short sellers targeted the stock a year ago. Short sellers have been 100% right up to this point, and I applaud their profitable trade. However, at this point, shorting TLRY stock is too expensive and too risky.
In fact, I’m a long-term cannabis bull. I have been recommending investors choose a basket of at least four or five top cannabis stocks to diversify their portfolio rather than putting all their eggs in one basket. To me, TLRY stock at its current valuation seems like a perfectly reasonable stock to include in that basket.
Tilray short sellers that are bearish on cannabis should just cover their positions and lock in their profits. Tilray short sellers that are bullish on cannabis should simply not include the stock in their basket of cannabis investments. But I don’t think anybody should be holding onto a short position in TLRY stock at this point.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.