If Reddit fatigue is a real phenomenon, Tilray (NASDAQ:TLRY) isn’t exactly showing much evidence of it. Earlier this month, the cannabis firm became the target of coordinated trading on social media, resulting in some compellingly bullish price action for TLRY stock. But is this dynamic worthy of your investment dollars?
While I might get some heat for this opinion — remember, folks, that’s all this is, an opinion — I don’t think so. Though the initial directive from the internet caught Wall Street by surprise, ultimately, high finance is comprised of professional traders. And the bigger picture for TLRY stock if you’re banking on Reddit is that you can’t swindle the swindlers multiple times.
As former President George W. Bush once said, “There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can’t get fooled again.”
However, the Reddit army also offers up some fundamental arguments that may support TLRY stock. Largely, chatter has risen about a potential legalization of marijuana at the federal level in the U.S. While incredibly speculative, we have President Joe Biden’s administration in power, which could swing the needle. Also, Democrats, while they tenuously hold onto their legislative majority, have every incentive to push the issue.
Now, I’m not entirely sure if the Republicans will move against legalization. What I do know for sure is that everybody wants high-paying jobs. And that could seal the deal for a rare act of bipartisanship. True, Republicans are bitter about the contentious 2020 election. But they’re not stupid (at least I hope not).
Legalization means jobs, and who doesn’t support that? But will that necessarily help TLRY stock? Maybe. But you don’t want to dive in without considering the risks.
Social Media Sentiment for TLRY Stock Will Likely Fail
The first challenge to TLRY stock will be industry saturation. With so many players in the cannabis space, success will come down to lower price, not necessarily product differentiation. That could hurt Tilray, which focuses on the science of cannabis and delivering effective solutions for end-users.
Second, the economic narrative must improve substantively for companies like Tilray to have a higher chance of success. Cynically, law enforcement agencies have much bigger problems than chasing illegal weed users. Therefore, without a robust labor market, the black market may impose headwinds for TLRY stock. Even with legalization, the unregulated market could pose price competition to the regulated one.
But the third challenge for Tilray as it relates to Reddit specifically is that the movement hasn’t convinced insiders — the people that matter — from buying in. Instead, they’re doing what I’ve been doing: thanking Reddit for turning pedestrian, or even bad, trades into extremely profitable ones.
Take a look at Tilray’s insider transactions. On June 3, 2021, after TLRY stock jumped about 22% on a trailing-month basis, James Meiers, president of Tilray’s Canada operations, sold nearly 24,000 shares. If Meiers would have “HODL”-ed for a while longer, he could have had even more gains.
Of course, if he had HODL-ed too much, he would have exited at a lower profitability rate than he actually did. But none of these theoretical scenarios matter. Meiers is not a HODL-er.
Indeed, that’s the trap of meme stocks. Go ahead and take a look at some of the most popular examples. You’ll notice that if there’s any buying, it mostly happened during the runup to the meme phenomenon. Afterward, the insiders — the folks that actually run the business — are dumping out as quickly as they can.
To me, this implies that eventually, the meme stock sentiment will die with the biggest backers laughing their way to the bank.
Were the Bears Doing Us a Favor All Along?
When you examine the motivations of Reddit traders, you’ll more often than not find a narrative about justice. This is about using the games the rich play to oppress the working class of America and turning it around on them. It’s modern-day Robinhood (the tale, not the mobile trading app).
But by bidding up these meme stocks, what we find is that one of the biggest beneficiaries, if not the biggest beneficiaries, are the insiders themselves. Yes, they believe in their company but only up to a certain premium. When Redditors push the company beyond that premium, guess who’s dumping?
The people who should be the most excited about the valuation bump. That should you tell you something.
Please don’t read into this as me being negative on TLRY stock. That’s not the point at all. Rather, if you’re thinking about buying Tilray based on Reddit memes, you should make sure that’s what you really want to do. I’ve said this before about other phenomena, but the call is really coming from inside the house.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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 healthcare.