Catalysts Aside, Tilray Stock Remains a Cannabis Name to Avoid

For the past few months, pot stocks, including Tilray (NASDAQ:TLRY) stock, have been back in vogue. With the odds of full U.S. legalization improved, thanks to the “blue wave” election results, that’s no surprise. The legalization trend continues worldwide, as more governments move to reform prior restrictions.

Tilray (TLRY) logo on a web browser.

Source: Jarretera / Shutterstock.com

In addition, some believe there is substantial upside for this particular pot stock, once its upcoming merger with a similarly sized rival closes. Yet, despite these possible catalysts, this remains a pot play to avoid. As you may know, I am very bullish on the cannabis sector at-large. Through my Cannabis Cash Weekly Service, I recommend which names in this sector offer the best opportunity.

But, in the case of this pot play, I believe the best move is to pass. That’s not to say it’s the worst cannabis stock out there. Yet, it’s clearly not one of the strongest contenders. Given your other options, it’s best to look elsewhere for exposure to this megatrend.

The Upcoming Merger Doesn’t Change the Game for TLRY Stock

Legalization and the merger haven’t been the only factors helping drive interest in Tilray shares. Another one has been this stock’s popularity among traders, especially those active on Reddit.

This popularity resulted in TLRY stock going on a roller-coaster ride back in February. As you may recall, the stock went from around $19 per share, to as much as $67 per share, only to give up most of these gains by month’s end. However, don’t expect a second round.

Why? This temporary surge had to do with the stock being heavily shorted by merger arbitrageurs. With its pending merger an all-stock deal, they shorted this stock, and went long its acquisition target. With a sudden increase in demand from Reddit traders, naturally the stock made an outsized upward move.

So, with the “Reddit trade” long over with, will this upcoming merger help put more points into shares? It’s possible, but not very likely in the near term.

This deal could work out for Tilray. But, it’s more of a “wait and see” situation. That is, investors will likely not jump back in the stock, until there’s evidence of the deal paying off. In short, while a possible catalyst in the long term, this upcoming deal won’t do much else to help the stock in the short term.

Tilray Is a Lackluster Legalization Play

The jury may still be out whether its headline-making merger will create shareholder value. But, admittedly, the legalization catalyst could help boost the stock once again over the next year. Recreational marijuana may now be legal in many U.S. states. But, on the federal level, it’s still a controlled substance.

Sure, changes may look set to happen. With the Democratic party controlling both the White House and the U.S. Congress, they have the power to implement major reforms. The problem? Even within the party, there’s still debate over how much change should happen.

The U.S. Senate, under the leadership of Chuck Schumer, wants to legalize it completely. But, President Biden, while supportive of decriminalization, remains on the fence about full legalization. Not only that, for Biden, and Vice President Kamala Harris, more pressing matters have made this a secondary issue. Putting it simply, U.S. legalization is still very much a work-in-progress.

The specter of legalization taking longer than expected is why patience is key when it comes to cannabis plays. The time will come where commercial production of marijuana becomes a fully legal, regulated business in the United States. But, with scores of stronger pot stocks to choose from, why go with TLRY stock for legalization exposure?

There Are Better Opportunities Out There

There’s nothing wrong with Tilray. There are other pot companies in much worse shape. But, like I discussed back in December, nothing stands out with this particular pot stock. Even after looking at its full-year results (released back on Feb. 17), things haven’t changed a whole lot. Sure, the company’s adjusted EBITDA is now finally above breakeven. These numbers will further improve, once the merger closes.

Yet, other cannabis companies are already much further ahead when it comes to profitability. Sales are growing at a decent clip (helped mainly by a big surge in medicinal sales outside its home market of Canada). But, this growth pales in comparison to the levels of growth seen with other names. And, of course, you could buy this stock, as a play on U.S. legalization. But, some of its better-capitalized rivals stand a greater chance of dominating this market, once it opens up.

Bottom line: with better opportunities out there, skip out on TLRY stock.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.  


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