Tilray’s Volatility Can Be Your Friend, But Carries Downside Risk

This year has certainly been an intriguing one for cannabis investors. Investors in Tilray (NASDAQ:TLRY) and TLRY stock have been taken on a wild ride, as the cannabis trade is back on.

Tilray (TLRY) logo on a web browser.

Source: Jarretera / Shutterstock.com

The key catalyst for this optimism?

Well, there’s more than one.

Legalization happens to be the tide that’s been lifting all boats in the cannabis sector in recent months. Lately, the tide has been more ebbing than flowing.

President Joe Biden’s Administration was widely anticipated to announce plans to legalize recreational cannabis use Federally early on in his term. However, he’s turned out to be quite the opponent in the legalization debate. Despite a relative lack of support for cannabis legalization from President Biden thus far, there remains a group of Democrats working behind the scenes to make this happen.

Additionally, the Reddit-fueled surge of retail investor interest in cannabis stocks has ebbed and flowed of late. Tilray stock has been among the most widely-discussed stocks among social media-savvy investors for some time. It’s largely viewed as a swing stock when it comes to the cannabis trade. This has both worked for and against investors in TLRY stock of late.

These catalysts, combined with a key merger with Aphria (NASDAQ:APHA) had sent shares on a parabolic ride in early February. Shares of TLRY stock had shot up more than 700% from the beginning of the year to its February peak. Since then, shares have plummeted more than 70%. The merger isn’t expected to close until the second quarter of this year, and investors seem to be impatient with progress on this front.

That said, this stock has still more than doubled since the beginning of the year. Let’s take a look at why there’s more bearish than bullish sentiment on this stock today.

Is This “Green Rush” Any Different from 2018?

Okay, so let’s tackle the first key catalyst at play with TLRY stock.

The legalization growth thesis underpinning cannabis stocks isn’t a new one. Investors may have to go way back to 2018 to remember the last “green rush” that sent cannabis stocks soaring.

On Oct. 17, 2018 cannabis was officially legalized for recreational use in Canada. Investors believed that this move by Canadian regulators could set the stage for some parabolic growth north of the border. Accordingly, expectations were that if this Federal legalization model proved successful, and no adverse effects were seen from State-specific legalization laws that were already in place in States like Colorado prior to Canadian legalization, that the stage was set for some pretty incredible long-term growth in this sector.

Accordingly, Tilray’s stock surged to a $300 intra-day high on Sep. 19, 2018. This high dwarfs the $67 high we saw in February of this year. Accordingly, it’s easy to see why retail investors viewed some pretty decent upside with this stock. It’s surged before. However, these crazy short-term moves also highlight how insane growth expectations were prior to the last legalization rush.

As we’ve seen with recent legalization-fueled cycles, the anticipation often dwarfs reality for a short time. Given the nascent state of the cannabis sector, anything goes when it comes to valuations amid a key catalyst like legalization. When it becomes impossible to value a company based on what most level-headed investors view as reasonable growth expectations, market capitalizations tend to fall back to earth eventually.

TLRY Stock Remains a U.S. Outsider

Accordingly, it’s important for investors to keep everything in perspective.

Unlike U.S. multi-state operators, Tilray is still primarily a Canadian producer. While Federal legalization would certainly open up the possibility of cross-border trade, there’s still the wild card at play of when (or if) legalization will take place. It’s a risky bet right now on everything proceeding perfectly according to the extremely bullish expectations of investors.

That said, Tilray has made some inroads into the U.S. market. The company owns Manitoba Harvest, a company with existing U.S. sales. Additionally, Aphria bought U.S.-based SweetWater Brewing for $300 million before the merger announcement. There’s hope that Tilray/Aphria can grow their market share in the U.S. meaningfully while awaiting Federal legalization.

However, right now, the company is largely locked out of the rapidly-growing THC market.


My belief is that the growth expectations priced into TLRY stock remain well in excess of the company’s long-term growth prospects right now.

Yes, there’s hope that the combination of Tilray and Aphria could boost the company’s global market share in a key growth segment. Additionally, there’s hope that legalization could unleash a wave of demand for the company’s products the likes of which we’ve never seen. With the potential to grow in higher-margin segments such as cannabis-infused beverages and other value-added products, this can seem like an attractive stock right now.

However, it appears a lot of the enthusiasm around this stock via retail investors has simmered down. There really never was the possibility of a short-squeeze with this stock to begin with. As more investors cut their losses with this name, downside momentum is likely to remain a key driving force for this stock for some time.

That said, any sort of inkling of progress being made on Federal legalization in the U.S. could spur another rally. Accordingly, I’m of the belief there will be a lot of volatility with TLRY stock for some time. For this reason, I’m on the sidelines with this one.

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

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective. 

Article printed from InvestorPlace Media, https://investorplace.com/2021/04/tilrays-volatility-can-be-your-friend-but-carries-downside-risk/.

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