As if we needed more headline excitement these last 18 months, GameStop (NYSE:GME) handed us a slew of them. The shenanigans that went on between the WSB gang on Reddit and the Wall Street pros was fun to watch. Unfortunately it marred the legitimacy of a whole bunch of others like Tilray (NASDAQ:TLRY) stock.
Remember that TLRY stock invented the super-spikes back in 2018. The stock exploded 15 times higher and without warning. Unfortunately, it quickly crashed thereafter and it took it 18 months to finally bottom.
By the pandemic bottom it had fallen 98% from the highs, and is still trying to repair the damage. What doesn’t help is that it happened again this year but to a smaller scale. Tilray spiked to $67 per share inside a tornado from the GME stock storm.
Unfortunately for the investors who chased it, TLRY stock again gave a big chunk of it back fast. Investors lost 70% of their value from the 2021 highs. Apparently, they didn’t learn from the first go-around and they needed a repeat.
It was a relatively easy mess to avoid. In February, it looked like it was stabilizing but I cautioned against buying the stock. In the same article I also suggested that the bulls will hold $20 per share. That’s exactly what happened, the stock consequently fell 50%. And the bulls indeed held that important support zone.
TLRY Stock Is on Stronger Footing
Now, and with a firmer base beneath them, the bulls can rebuild the upside momentum.
Because I rely on the technicals, my opinions sometimes come across as an antagonistic. Quite the opposite, the cannabis industry deserves a lot of credit. Pot stocks are doing this well in spite of still being illegal in the United states. This could change this year because with the new administration comes new hope for federal legalization.
Once the talks rekindle about loosening of the rules, TLRY stock would catch another big tailwind. But management is not idly waiting for help. They are actively making their own headlines. Last year they announced their merger with Aphria (NASDAQ:APHA). We should be closer to an update on when the deal closes. The structure was dynamic, so the details are not absolutes yet.
Until then, they are still fighting many obstacles. So far, the team has risen to the occasion but there’s so much more work to do. The fundamental metrics are not yet a selling point but they are improving. They are far from the shambles they were when cannabis stocks first burst on to the scene in 2018.
Fundamentals Have Significantly Improved
Now, Tilray has a reasonable price-to-sales ratio under 16. Although it’s not cheap, it’s definitely not as exorbitant as it was back then. There is also tremendous top-line improvement to justify the current ratios. Total revenues grew 10 times in four years. It is therefore reasonable to expect that the trend will continue or accelerate.
They are still losing money but that’s not a metric investors should fret yet. Once they stop growing, then we would demand to see profitability. Until then, delivering growth cannot come while pinching pennies.
I still favor the long-term strategies with cannabis stocks. You either believe in them or you don’t. The alternative would be to actively trade around the stock chart knowledge. Technically, there is support above $20 per share. Moreover if the bulls can rise above $25 they can ignite another 20% rally from there.
It Is Worth Exploring Alternative Methods
The options markets also offer great ways to get long TLRY. Instead of buying shares today investors can sell puts instead. This allows them to be bullish now but leave room for error. For example, instead of paying $22,500 to own 1,000 shares, I collect $2,400 for the opportunity to own them at $20. This trade has 50 days on the clock and does not need a rally to win. In fact, the stock can fall 20% and I would still break even.
The drawback of doing this is that I collect the maximum profits up front. If I want to participate in more than 10% of upside I would have to add call options as well. My strategy usually entails selling the puts first, then if the breakout confirms, I would add calls.
Regardless of the method, since equities just set records, I would not take a full-size position at once. Leaving room to add at lower prices makes for a sensible strategy.
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.
