There has been a lot of noise in the market in 2021. The rise and fall of so-called social media “meme” stocks like Canadian cannabis producer Tilray (NASDAQ:TLRY) stock may be the noisiest phenomenon of the first half of the year.
Meme stock mania has focused mainly on stocks that have extremely high short interest. The problem is that these heavily shorted stocks are not chosen at random. Short sellers mostly target stocks with businesses in secular decline. Companies on the brink of bankruptcy, stocks that have become overly hyped and businesses that are burning cash hand-over-fist are popular targets for short sellers.
In that respect, most of the popular meme stocks of 2021 are actually terrible long-term investments.
But there are a handful of relatively high-quality stocks that are mixed in among the lemons. A closer look at TLRY stock reveals a company that has a lot of things going for it. In fact, Tilray could make an excellent long-term speculative investment. Here are three reasons to buy TLRY stock.
TLRY Stock Has Aphria Synergies
When you take a look at TLRY stock in 2021, you must start with the Aphria merger. The deal officially closed on May 3, making Tilray the world’s largest cannabis company by revenue.
The combination with Aphria creates unrivaled scale for Tilray. It also provides plenty of cost-cutting opportunities in the Canadian market, according to Morningstar analyst Kristoffer Inton. He says:
“We view the target CAD 100 million [$81.1 million] of cost synergies as achievable as they represent just 9% of combined costs and overhead expenses and we see significant low-hanging fruit.”
He says Tilray management historically demonstrated a responsible approach to spending. In an industry in which profitability and cash burn are still major issues, cost cutting is critical. Tilray has selectively invested in growing its business. But it has not overextended its balance sheet and has navigated a challenging Canadian cannabis market.
Tilray Has Domestic and International Presence
Canada is the main market for legal cannabis sales in the world today. However, most long-term cannabis investors believe Canada is just the first step in a global legalization process.
Today’s Canadian cannabis companies are working to balance two goals. First, they are establishing an early footprint in the Canadian market. Second, they are attempting to position themselves in key international markets.
Cantor Fitzgerald analyst Pablo Zuanic said the Aphria merger gives Tilray great positioning on both fronts.
“Except in recent months (deal-related distraction?), Aphria was one of the best performers in Canada [recreational cannabis] achieving a #1 position (speaking in organic terms, and did so while achieving positive cannabis EBITDA), and Tilray ran ahead of peers in the export cannabis markets,” Zuanic says. “We do not see another [legal producer] that can make these combined claims.”
Zuanic says Canadian scale, an international sales platform and a credible management team are three keys to success for cannabis stocks. Zuanic has an “overweight” rating and $22 price target for TLRY stock.
Tilray Is Ready to Pounce on the U.S. Market
The golden goose for cannabis investors is U.S. federal legalization. At this point it’s unclear how far away full U.S. legalization is. But it certainly seems like the ball is moving in that direction.
Bank of America analyst Heather Balsky says Tilray’s recent proposal to increase its share count is a hint at Tilray’s approach to the U.S.
“The Board notes in the proxy that the additional authorized shares are to help the company pursue M&A and financing opportunities. We surmise that the company is specifically focused on preparing itself for eventual US cannabis legalization,” Balsky says.
She says the post-merger Tilray is in a good spot to improve its liquidity position. In addition, she says Tilray has a path to generate consistently positive earnings before interest, taxes, depreciation and amortization and expand the TLRY stock earnings multiple over time.
Bank of America has a “buy” rating and $21.50 price target for TLRY stock.
How to Play TLRY Stock
The cannabis industry is still in the very early stages of a potentially massive long-term growth story. It will likely remain unpredictable and volatile for years to come.
I recommend investors take a diversified approach to cannabis. Instead of gambling that TLRY stock will be the big long-term winner, simply include it in a basket of at least four or five top Canadian LPs and U.S. multi-state operators. Prioritize high-quality companies. Look for stocks that are taking a responsible approach to growth, increasing sales without extreme shareholder dilution or cash burn.
On the date of publication, Wayne Duggan 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.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
