With the political winds shifting in favor of possible cannabis decriminalization, it’s tempting to go all-in on a company like Tilray (NASDAQ:TLRY). After all, Tilray stock is among the most heavily traded names in the cannabis sector.
During times of high optimism, however, contrarian investors should consider backing away from the trade. The last thing you’d want to do is be a victim of FOMO, or Fear Of Missing Out.
In other words, the expectations of political progress toward cannabis legalization may have already been priced into Tilray stock. The markets can be overly forward-looking at times as traders get ahead of themselves, making an imminent pullback a real possibility.
One prominent analyst offered a note of caution on Tilray stock and specifically mentioned the FOMO factor. Analysts aren’t always right, but in this instance, the concern may be well-founded.
A Closer Look at Tilray Stock
It’s probably not a coincidence that Tilray stock spiked during and after the U.S. presidential election. Thus, from Nov. 3 to Nov. 9, the TLRY share price popped from $6 and change to more than $10.
That type of move is often unsustainable, and the pot shares proved this point. By Dec. 7, the Tilray share price pulled back to the $8.50 area and then to below $8 yesterday. Even with this retracement, though, the stock price remains somewhat elevated in the short term.
Value-focused investors should be advised that Tilray stock’s trailing 12-month earnings per share is -$4.13. That’s certainly not a good number for a stock that’s trading at $8 or $9.
Nonetheless, the bulls remain in control, if only for the moment. So, what’s all of the cannabis-market optimism about, anyway?
Cannabis Reform in Progress
For the most part, the recent enthusiasm surrounding Tilray stock isn’t about the company in particular. Rather, it’s related to a general feeling that cannabis will be decriminalized across the United States.
Voters in five states (Arizona, Mississippi, Montana, New Jersey and South Dakota) recently approved some form of cannabis legalization. Consequently, the U.S. now has 15 states which have approved cannabis for adult use.
Moreover, Vice President-elect Kamala Harris has sponsored the MORE Act, a proposed measure that would remove cannabis from the list of controlled substances.
Speaking of the MORE Act, the U.S. House of Representatives recently passed that bill, bringing it one step closer to becoming a law and thereby legalizing marijuana at the federal level.
Hold Your Horses
With these developments in mind, traders have bid up the share price of Tilray stock and other cannabis names. Yet, before you considering jumping into the trade based on FOMO, I implore you to hold your horses and reconsider.
I hate to be the bearer of bad news, but the MORE Act doesn’t stand a chance of getting through the Senate. Majority Leader Mitch McConnell, who pretty much controls the floor of the U.S. Senate, is evidently not a fan of this bill at all.
Without McConnell’s support, the MORE Act is not likely to become the law of the land. And with the share price already run up during the election, now’s not the time to chase Tilray stock.
In that vein, analysts at Jeffries warned investors that “not reflecting fundamentals, the share price has run up on retail US market FOMO” on the election. They called Tilray’s valuation “unfairly inflated” and downgraded their rating on the stock from “hold” to “underperform.”
Avoid FOMO Faux-Pas
FOMO is, I believe, one of the cardinal sins that stock traders can commit. It tends to occur when there’s optimism surrounding a stock and the price has run up excessively.
Marijuana law reform is a process that takes time. Tilray stock traders shouldn’t front-run that reform by purchasing the shares too quickly. It’s better to be cautious and let the politicians work it out, than to catch FOMO fever and end up losing money.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.