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For a while, it seemed like nothing could go wrong for Tilray (NASDAQ: TLRY). Canada's marijuana stock jumped 184% in August. It exploded another 228% between September 1st and September 19th. No other stock on the market has been as hot as Tilray. And then the sizzle is smothered.
Last week, Tilray started a dive still underway. In three business days, the company lost half of its market capitalization. Some investors have probably earned a lot of money thanks to Tilray. Others who jumped aboard the frenzy probably lost a lot of money. But whether you've bought this marijuana stock or not, every investor can learn three things about the rise and fall of Tilray.
Source of the image: Getty Images.
1. Always keep business perspectives in the center
The most important lesson of all is to always keep business prospects at the center of attention. In the long run, owning an action is the property of a company. Tilray's shares have definitely been disconnected from the company's business prospects.
Tilray does not have great business prospects. The company is expected to be a big winner in the Canadian market for recreational marijuana, scheduled to open on October 17, 2018. Tilray has already concluded supply agreements with several provinces and territories. territories. The company is strengthening its production capacity to meet the demand in the domestic market and in the growing international markets for medical marijuana.
But if there was any doubt about the fact that Tilray's stock gains were not related to the reality of its business prospects, a comparison with Canopy growth should have settled the matter. Both companies have the same growth opportunities as the others. But Canopy has greater production capacity, more money and a close relationship with a major liquor manufacturer that Tilray does not currently have. Despite all this, the market capitalization of Tilray exceeded Canopy. This was the obvious sign of a break between Tilray's business prospects and its course.
2. Be skeptical about huge motions without a clear underlying catalyst
There have been several days in recent weeks when the price of Tilray action has surged without new developments. When there is no clear underlying catalyst behind a large movement, it is good to be skeptical.
Of course, equities can change quickly as large institutional investors buy large blocks of shares over time. This creates upward pressure on the stock price. And it's certainly a positive thing that a stock gets institutional support.
On the other hand, quasi parabolic stock gains, such as those of Tilray, can often be the result of a short tightening. Tilray's short interest has been high. His stock is weak. Combine these two factors with some positive news, and you get the kind of scenario that we saw with the epic increase of Tilray. Short sellers began to hedge positions as inventories rose, contributing to higher inventories. But when the short cover was over, Tilray started refueling.
3. Carefully consider the factors behind significant inventory movements
Sometimes, the factors that underlie the movement of large stocks seem to be obvious. For example, it made sense that marijuana stocks, including Tilray, jumped when Coca Cola could be in discussion with Aurora Cannabis about a partnership. The CEO of Tilray, who appears on CNBC and talks about the prospects of the cannabis industry, is also the kind of thing that often gives a boost to a stock.
But even if the catalysts are clear enough, it is always advisable to look carefully at these factors. For example, investors should have wondered whether the significant increase in Tilray's market capitalization made the company more or less likely to attract a major partner outside the cannabis industry. There is a real possibility that this could reduce the likelihood of a significant stake like that Constellation Brands done in the growth of the canopy.
Comments by Brendan Kennedy, CEO of Tilray, on CNBC is an even better example of why investors should carefully study the catalysts underlying large stocks. Kennedy claimed that there could be several marijuana companies with a market capitalization of $ 100 billion or more with a global cannabis market worth $ 150 billion. His figures may be accurate, but some investors may not have understood that the global cannabis market is not expected to reach nearly $ 150 billion.
In defense of Tilray
It's easy to fight the company after the crazy gyrations that Tilray has suffered. However, it is not Tilray that caused a short tightening or its consequences. The situation with Tilray was rather caused by traders who were betting on the stock and realized that they were losing a lot on these bets.
Will Tilray's stock price continue to fall? It would not be surprising if that was the case. At one point, the stock will be more in tune with the realistic business prospects of the company. When that moment comes, whether in a few weeks or months, Tilray will become a stock to consider about the merits of its potential growth – keeping in mind the three lessons discussed earlier.
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