Up until recently, short-sellers have been having a field day with cannabis stocks, but it’s now becoming a prohibitively expensive and extremely volatile game as Canada’s official legalization of recreational marijuana nears and the deal field in the pot sector sizzles.
The biggest news earlier this week was Tilroy (TLRY), which overtook industry favorite Canopy Growth to become the biggest pot stock by market cap. On Monday and Tuesday, Tilroy gained a whopping 29 percent, giving it a market cap of over $14 billion.
But the biggest number was this: Tilroy has seen an 800-percent gain since it’s July IPO.
It’s push further upwards on Tuesday came as it gained approval as the first cannabis company to export legal week to the U.S. for a clinical trial at the University of California, San Diego.
But volatility rules this roost.
On Wednesday, Tilroy gained another 40 percent in pre-market trading, but later that day it lost over 11 percent—and trading was halted five times throughout the day because of volatility. Related: UK Unicorn Eyes Flying Taxis By 2022
By Thursday, Tilroy was trading down 18 percent, but as of early morning trading Friday, Tilroy’s market cap was over $16 billion, even as it was trading down over 17 percent.
(Click to enlarge) The short-sellers are still playing this game, and Tilroy has a small number of shares outstanding, which means that there aren’t many investors around who can lend to short sellers, increasing the stock’s wild volatility, according to Market Watch.
Put another way, these massively inflating pot stocks are now worth more than, Macy’s, American Air or Clorox.
In the meantime, Canopy Growth’s market cap as of early-morning trading Friday was closing in on $12 billion.
(Click to enlarge)
Tilray may be the new top dog in the cannabis pack, but it is also what short-sellers are looking at with this overnight sensation: The company has little by way of revenue.
But the bulls in the room see this: Tilroy has a big international strategy, producing medical cannabis in Canada and Europe and supplying products in 10 countries on five continents. They see the tens of thousands of patients already on the receiving end becoming many, many more. They see some 30 countries with legalized medical marijuana; and they see that number improving rapidly.
They like Tilory’s long-term goal:
“Our long-term vision is if a patient walks into any pharmacy in any country in the world that has legalized cannabis, that patient should be able to obtain a Tilray product. That’s our global goal,” Bloomberg cited CEO Brendan Kennedy as saying earlier this week.
The bulls also like that this company is generally thought to have a very strong management team and the backing of billionaire investor Peter Thiel.
But Canopy Growth itself issued a warning this week, with CEO Bruce Linton saying “There’s too much hype too soon”, equating it to the dot-com bust.
But that doesn’t mean there isn’t huge opportunity here.
“You've got to look at this as a really ginormous, unbelievably accelerated global opportunity. There will be a company that, instead of talking about a billion-dollar market cap, you'll be talking about a billion dollars in revenue. And then you'll be talking about multiple billions of revenue, and it will be coming from diversified areas that go from the basic product -- the basic ingredient in cannabis flower -- to the clinical-trial results and medical outcomes with highly durable margins,” he said in an interview with The Street.
It’s not, however, Tilroy that investors should be worried about. Tilroy “may have gotten a little bit ahead of themselves in valuation, but that’s not their fault. There are a number of not real businesses that want to get real rich in and out quick. Those are the ones to be cautious of”, Linton said.
For Canopy Growth, another catalyst this week is the launch of trading of Canopy Rivers, it’s venture capital arm, which takes minority stakes in smaller, private companies and which is set to begin trading today on the Toronto Stock Exchange.
By Josh Owens of Safehaven.com
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