Tilray (TLRY) shares have gone up more than 670% since the beginning of 2021…outpacing other major Canadian LPs [by a wide margin]…This ascent has gone too far and too fast which means the risk of a correction is high….
…The cannabis sector has been on fire since the November U.S. election as investors bet on the increasing possibilities of federal legislation under Democratic leadership. Moreover, the rally has intensified after the Georgia Senate runoff and recent comments made by Senate Majority Leader Chuck Schumer, which declared federal cannabis legalization as a top priority for this Congress and promised to release a unified draft of comprehensive cannabis reform in the early part of 2021. [Furthermore,] Canadian cannabis stocks have benefited disproportionately given their underperformance in the last couple of years and their listings on major U.S. stock exchanges also made it easier for investors to pile in.
…We upgraded Tilray on January 6, 2021, based on our belief that the merger with Aphria (APHA) is a positive development for the stock and provided a further update on January 15 and reiterated our bullish stance due to its cheap valuation relative to its peers and room for further upside. However, at this point, we think taking some chips off the table would be a wise decision given the stock is clearly overheated in the near term…
We believe the current rally in Tilray shares was partially driven by its high short interests and prevailing market phenomena of massive short squeezes in highly-shorted stocks after the GameStop saga. Tilray has 34 million shares shorted which represents ~20% of its shares O/S. For reference, Canopy Growth has 8% of its shares shorted and Aphria has 6% of shares shorted. Tilray’s float of 95 million shares is also smaller than other cannabis stocks, which makes it more susceptible to extreme short-term price movements.
Take Some Profits Now
While the current momentum behind cannabis stocks is unlikely to dissipate as the U.S. legalization progress is real and remains a near-term catalyst, the near-term price action on Tilray shares has far exceeded our perceived improvements in its fundamental outlook. [As such,] we think it would be logical to take some profits off the table if you are Tilray shareholders who have benefited from the recent rally.
We think the 50% merger arbitrage implied by Tilray and Aphria shares is the best evidence that Tilray shares are trading at inflated levels.
The strong macro tailwinds mean that the rally could continue but a future reversal of momentum could be just as precipitous. It would also be reasonable to take some profits off the table while keeping some skin in the game in order to capture additional momentum for people with high risk tolerance…
In the long term, our favorable view of Aphria/Tilray remains intact as we believe the combined company will become one of the leaders in the global cannabis sector, rivaling Canopy Growth due to more attractive valuations, better profitability, and execution track record.
Tilray shares jumped more than 50% on Wednesday alone which is not healthy. We fully expect the stock to pull back which would have reverberations around the entire cannabis sector and be unhelpful for the long-term health of the industry.
…We are getting worried about the pace of recent price appreciations which are signals of short-term overheating in the stock. Therefore, we think investors would be well-served to take some profits off the table while maintaining some skin in the game, depending on their level of risk tolerance.
In good times, it is easy to lose sight of the big picture. We hope this article is helpful for investors to revisit the 2019 frenzy and be reminded of the significant risks when stocks rise too much too fast, like what we are witnessing in Tilray shares right now.
Editor’s Note: The original article by Cornerstone Investments, has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The authors’ views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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