Investors Should Be Realistic with Tilray Stock

After suffering more than a year of gross underperformance, cannabis advocates had hoped that 2020 would bring a change of fortune. As you know, that just didn’t happen. With the novel coronavirus destroying the labor market and stunting economic momentum, it wasn’t just Tilray (NASDAQ:TLRY) and cannabis-specific names that felt the heat. Still, at some level, you would expect Tilray stock to perform well during this crisis.

tilray (TLRY) logo on a web browser
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Primarily, I say this because the pandemic has been a stressful event for everyone. According to an official statement by the Centers for Disease Control and Prevention, “Fear and anxiety about a new disease and what could happen can be overwhelming and cause strong emotions in adults and children. Public health actions, such as social distancing, can make people feel isolated and lonely and can increase stress and anxiety.”

Yeah, no kidding! Both Americans and Canadians are likely feeling the exact same way about the turmoil. Naturally, such stressors lead to coping mechanisms. According to a study from the University of Utah, alcohol consumption increased significantly during the peak of this pandemic. Cynically, this bodes well for Tilray stock in that many users seek cannabis products for relaxation and stress relief.

Further, the assumption is that greater pain economically can provide a lift for “vice” products. Historically, the film industry provided escapism during financially challenging years. With multiple traditional entertainment options axed, people must seek out alternatives for their diversion. In theory, this dynamic should help Tilray stock.

Unfortunately, this thesis just hasn’t panned out for TLRY nor other cannabis investments, like Canopy Growth (NYSE:CGC) or Cronos Group (NASDAQ:CRON), which are down 23% and 31% year-to-date, respectively. Why?

Tilray Stock May Be Shedding Some Catalysts

For one thing, the evidence to support vice product consumption isn’t completely clear. For instance, a research paper listed on the National Library of Medicine’s website stated that “no significant changes in smoking prevalence trends over the period 2005-2010.” Thus, the paper concluded that the “2008 financial crisis had a weak effect on smoking prevalence.”

If so, that presents some questions about Tilray stock. Sure, cigarette smoking and marijuana are different activities. But some overlap exists that warrant concern if recessions don’t have a positive impact on smoking rates.

Another concern is the viability of recent laws, dubbed Cannabis 2.0, in Tilray’s native Canada. On paper, Canada’s facilitation of derivative products such as cannabis vaporizers should open additional revenue channels for TLRY. However, the U.S. has been moving to ban liquid-based vaporizer products. And Canada has demonstrated a willingness to follow suit.

For instance, in February Ontario banned flavored vaping products from being sold in convenience stores. While Tilray’s cannabis vaporizer products should be safe from heavy-handed regulation now, it’s possible that its liquid-based vapes could come under the spotlight later.

Further, the politicization of Covid-19 has brought unwanted attention toward the U.S. vaping market. A recent study indicated that e-cigarette usage increases the risk of novel coronavirus infections. Again, the U.S. market is obviously different from Canada’s market. However, the two nations’ public health agencies tend to support similar restrictions regarding these vice products.

Finally, the fundamentals underlining Tilray stock doesn’t inspire much confidence. While revenue growth is strong, both profitability and financial stability metrics are a mess. Worryingly, Tilray’s Altman Z-score indicates that TLRY is deeply distressed.

Most investors are probably looking at these signals and heading for the exits.

Black Market Could Limit TLRY

Despite the transformative nature of legal cannabis both in Canada and the U.S., the black market has been a thrown in its side. In the pre-pandemic years, I didn’t think this would be a longer-term headwind because of the cost-benefit analysis. Basically, it wasn’t worth it for consumers to risk jail time when legal options abound.

That was still the case throughout this pandemic. But with social unrest and its persistent and now accelerating scope, law enforcement has bigger problems on its hands. And that means black market weed is much more attractive than usual. With cops looking the other way, perhaps the cost-benefit analysis is favorable to illicit marijuana.

Thus, it’s possible that the black-market incentive has become stronger as a result of increased violence in America. If so, Tilray’s U.S. cannabidiol (CBD) business via its Manitoba Harvest acquisition is threatened. And with economic pressure in Canada, users have more reasons to get their fix through “alternative” channels.

While I support the long-term case of cannabis, I’ve got to be realistic. This sector is just not moving, presenting challenges for embattled organizations. Specifically, investors should be very careful about approaching Tilray stock at this juncture.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and health care.


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