They say old habits die hard. This was certainly true for Tilray (NASDAQ:TLRY) stock. In February it spiked 270% in eight days. Sadly for those who chased late, it gave back most of it almost just as fast. What’s worse is this was not the first time TLRY stock did that.
In 2018 and after only one month of its IPO, it shocked investors with a very fast 800% spike. It blew up violently from $30 per share. Almost half of the spike came in the last day, not unlike what just happened to GameStop (NYSE:GME).
Short squeezes happen but not to this nth degree. In those two instances it was likely a combination of panic and shenanigans. Regulators need to figure out how to stop future ones because they cause lasting damage.
After the 2018 spike, TLRY stock languished for two years before building positive momentum. Granted the whole industry also suffered but this one carried a special stigma among investors.
As with most other stocks, it finally bottomed last March under $2.50. It is now 1,260% higher so it’s not an obvious starting point for new investors. This is not a call to short it because the sector is too strong. Nevertheless, I bet is that we will have an opportunity in the next few months to buy it lower. The political tailwinds are abating. I am not a hater and proof is that I’ve written positively about it often. I just prefer to wait out undue risk.
Even though technically TLRY stock has support I still would opt out of buying it here. This is nothing against its long-term prospects but there is a giant binary variable. In December, Tilray and Aphria (NASDAQ:APHA) announced a merger agreement made up entirely of stocks swaps. Since then the moves have been so huge and uneven that I fear the deal could fall apart. I am not predicting that it would, but merely that it could. Having this serious of a catalyst be in doubt causes me to pause. Their goal was to close the deal in the second quarter, so we will soon find out.
TLRY Stock Will Need a White House Headline
Fundamentally the whole cannabis sector benefited from a massive election rally. It started in November and it continues strong through the initial stages of the Biden presidency. The prevailing consensus is that this White House will federally legalize marijuana. Some states like California did not wait and they acted on their own. But it is still illegal for companies like Tilray and Canopy Growth (NYSE:CGC) to do business across state boarders. The fact that they are doing this well on Wall Street and Main Street is testament to their resolve.
Fans of cannabis stocks have great conviction in their long-term success. There were stints of worries but if they survived 2020 then the rest should be a cakewalk. TLRY stock rallied 2,800% from the March bottom. Even after this drop it is still up way too much too fast to go all in. From here there is no significant incremental headline help. The Biden administration will either confirm the speculation or kill it. Either way, the stock spike will likely stay a top for a while. Conversely, not getting the legalization would devastate these stocks.
Under normal circumstances, timing entries in momentum stocks is tricky. Doing so with ones that have had two super spikes is exceptionally difficult. Friday it was down 9%, pre-open today it’s up 5%. Therefore, conviction must be medium at best for at least three months. These super squeezes are not normal and they hurts both bulls and bears. The only ones benefiting from all of this are the market makers.
Fundamentals Look Good for Continued Success
TLRY stock had a technical bullish setup at $12 per share, but that’s now history. Last week, it fell back into support from November of 2019. This is where the bulls can make a stance to stay out of the muck near $20. Management has done a good job by growing revenue 15 times. The team is thinking outside and teaming up to get even bigger. A lot is riding on that merger to go through.
Since we don’t know how the two will blend, I will use Tilray’s current metrics to judge it. While their P&L shows tremendous growth, the losses to produce them also ballooned. The merger could help normalize that a bit by having synergies. I don’t need them to be profitable as long as they are growing. Spending a lot in order to create growth is OK, but bleeding cash profusely is not.
Luckily, current investors have reduced their expectations from the stock. Its price-to-sales is 20, which in today’s environment is decent. This wasn’t the case in 2018 when cannabis stocks first burst onto the scene. The relationship between market-cap and yearly sales was insane back then.
My sentiment for this company is that they will make it. I don’t want to short it but I do want to be picky with what levels to buy. Remember that sometimes the downside pressure in a stock comes from outside factors. The whole stock market has never been higher and on horrendous economic conditions. Wall Street in general could be headed for a big wake up call. This may not happen imminently but it’s coming. Caution is a great idea so investors should at least take small bites up here.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
