Tilray is celebrating as if it were in 1999 (and it will not end well) – The Motley Fool

The baton has been officially passed. These are no longer the cryptocurrency and blockchains of the darlings of Wall Street. It's now the marijuana stocks.

It's not hard to understand why the potash stocks have risen to the skies since the beginning of 2016. Our northern neighbor, Canada, passed a law to legalize marijuana for recreational purposes in June. In just 28 days, Oct. 17, recreational weeds will go on sale in licensed clinics, opening the door to billions of dollars in additional annual sales, at the top of what the industry is already generating through pot sales. medical supplies and exports. to foreign countries that have legalized medical cannabis.

This marijuana stock is partying as if it was in 1999

However, two marijuana titles are not alike and they clearly outperformed. For example, no pot stock did it better (or even near it) than Tilray (NASDAQ: TLRY) Since its IPO on July 19th. After valuing his shares at $ 17, Tilray reached $ 300 per share on Wednesday, September 19. For those who keep a home score, we are talking about a gain of more than 1,600% in the space of two months. With the exception of crypto-currencies in the fourth quarter of last year, the last time we saw a surge like this for an individual title and for the sector as a whole, it was during the 1999 expansion.

To be clear, Tilray as a business is a company that investors in marijuana stocks can appreciate. He was one of the first producers to receive a culture license from Health Canada, so he had more time than many of his peers to develop his brand and create a healthy patient. Differentiation is extremely difficult to find in the cannabis space and Tilray is one of the few producers able to do so far.

Tilray has also been fueled by speculation. following Molson Coors Brewing Co.joint venture announcement with HEXO Corp. and Constellation Brands& # 39; Investment of $ 3.8 billion in the Canopy Growth Corp. (NYSE: CGC)It is believed that Tilray, due to its strong brand presence and supposedly high-level production capacity, should be next on the list.

Nor can we ignore the obvious: betting against Tilray has been painful, if not virtually impossible. A few days ago, the data analysis company S3 Partners noted that Tilray's annual borrowing costs were up to 370%. A tweet that I saw posted on Wednesday showed an account where an anonymous brokerage wanted to charge a 565% APR against Tilray. Then there are the options contracts, where the prices of the put options are so high that you will need 50% to 60% of stock to have an intrinsic value on your contract.

All of these factors helped push Tilray to a market capitalization of more than $ 26 billion at one point. For added context, it's bigger than CenturyLink, Kroger, German Bank, and Hershey, to name only a few leading companies.

Sorry, friends, but it will not end well

Although this movement has really been something to amaze, it will certainly not end well. The dot-com bubble, the collapse of genomics, the derailment of 3D printing and the seizure of cryptocurrency are evidence in this regard.

Basically, even with Tilray running at full capacity, a valuation of $ 26 billion is not an option. The company plans to develop 912,000 square feet of developed land at the end of the year. Some 56,000 square feet will be dedicated to processing, with the remainder going to culture. Being generous, this suggests that Tilray could be in the process of producing 75,000 kilograms at perhaps 85,000 kilograms per year.

Tilray has the ability to quadruple his growth space, if he wishes, according to his land. Naturally, it would probably take 12 to 24 months. Even in such a utopian scenario, Tilray will not produce more than 300,000 kilograms per year (without acquisition) until 2021, in my opinion. Relatively, Aurora Cannabis and Canopy Growth Corp., which are not even close to Tilray's market capitalization combined, have a maximum production potential of 500,000 kilograms to the north. And to begin with, Aurora and Canopy Growth will reach more than 500,000 kilograms of peak production much faster than Tilray would, for example, reach 250,000 kilograms or 300,000 kilograms.

Tilray's recent announcements are not as important as those in the market. For example, having a decisive advantage in shipping dried cannabis and cannabis oil to Germany is excellent, but that will not necessarily be the case for some time. In addition, being the first Canadian stock to have received authorization to import medical cannabis into the United States for a clinical study on essential tremors is a real feather in the business, but that does not Not necessarily going to do much for the moment. if ever.

The company also has a lock-in date in less than four months. As of January 15, 2019, insiders will be free to cash some or all of their shares. Given how much Tilray appreciated, it's a near-certainty that we'll see sell on that date.

The most important factor that investors need to understand is that most of this period is probably due to the institutions' high frequency trading (HFT) programs. Although buyers would like to believe that optimists are encouraging Tilray by placing purchase orders, the truth, according to JPMorgan in 2017, is that only 10% of the daily volume of the overall market are regular transactions. the rest comes from HFT programs.

These HFT programs are designed to work with certain parameters and provide a good amount of cash to the market. However, when a stock like Tilray, which went almost vertically over the past month, collects the slightest hurdle downward, these EFT programs are likely to interrupt trading and drain liquidity. Essentially, this will create a "flash crash" Tilray. There has been a handful of documented cases where the stock market as a whole has been hit briefly due to the halt of HFT programs and their inability to provide liquidity. My personal hint is that this is what will happen to Tilray in the not too distant future.

In short, it's an economic model that I really like, but a stock that I absolutely can not stand. Shortening it or buying vouchers does not make sense because of the huge costs involved, but it's pretty obvious, fundamentally and historically, that this momentum will not continue in the long run.