Tilray’s Remarkable Success Holding Management, Cannabis Sector Hostage

Benjamin A. Smith

Tilray Inc (NASDAQ:TLRY) (FRA:2HQ) tulip bubble-like price action doesn’t need any additional commentary. The Novartis AG backed cannabis LP powered its way up $155.04/share at one point today, giving it a quadruple-digit percentage gain in less than a month. While insiders must be ecstatic, the insanity is likely hampering the company’s operating strategy, while simultaneous holding the cannabis sector hostage as well.

To briefly recap, Tilray behaved in a manner I have personally never witnessed before. As a veteran high volume trader during the Tech Bubble, I’ve seen my share of price action insanity. But today’s ↑93.57% HFT-inspired intraday bone crusher—on zero material news—stands out.

A foreshadowing of today’s hi-jinx began right at the opening bell. After gaping-up $80.04 to $235.00/share (↑51.63%) by cause of a Bloomberg puff piece titled World’s Most Valuable Pot Company Envisions $100 Billion Future disseminated Tuesday afternoon, Tilray proceeded to drop $55.00, peak-to-trough, in less than two minutes off the open. One of the world’s most liquid stock exchanges, NASDAQ, had essentially turned into a giant casino.

After stabilizing and finding its range in the morning session, prices began consolidating near the daily high in the afternoon. This set the stage for breakout of $240.00 intraday resistance, with prices soaring to $300.00/share before the first of four separate trading halts was implemented. However, each time Tilray reopened, circuit breakers triggered mere minutes after because volatility was so extreme.

Although today’s price action in Tilray was an outlier, it’s this type of persistent volatility which is surely hampering the company. Why? Because as Midas Letter CEO James West notes, how can the company raise capital with the stock bouncing around this violently? Watch.

James West addresses how Tilray’s equity volatility is paralyzing the company’s ability to raise capital and initiate acquisitions (15:55-16:45)

Prospective investors and institutions have no idea what Tilray’s intrinsic value really is, because the HFTs have completely divorced the stock from that reality. Nobody is going to cut a check anywhere near 5-day VWAP, as the company’s worth far less than what the stock price implies. Neither can Tilray raise at 30%, 40% or 50% discount because that would severely agitate its institutional and retail investor base. The ultra-tight share structure and HFT trading stranglehold is holding Tilray down.

Why else hasn’t Tilray taken advantage of these windfall market gains to raise capital? As we noted previously, the company only has about $25 million USD in cash on hand, plus an available revolving credit facility of another $25 million-plus more. That isn’t very much when you consider Tilray posted a 2Q 2018 net loss of $12.8 million, and the extra operating expenses the company will incur leading up to legalization. No doubt a better earnings picture is close at-hand, but that’s probably at least a couple of quarters away.

On the acquisition front, Tilray undoubtedly is looking to make moves. As an anointed leader in the space, its balance sheet looks awfully skimpy next to the likes of Canopy Growth Corp. and Aurora Cannabis Inc.—especially in South America, apart form a few distribution deals. If Tilray really strives to be a world-leading cannabis operator, it’s going to need to go shopping soon.

But how can Tilray cement any deals with its common shares when their value fluctuates so wildly? It’s akin to the reason why Bitcoin was never truly accepted as a viable currency: too much persistent volatility—in both directions—made it impossible for merchants and consumers to fairly value and hold BTC for any length of time. Thus, it mainly became a speculator asset, subject to the whims of the very same low supply/HFT dynamics we see today in Tilray. Only the introduction of artificial supply via CBOE futures has helped tame the beast.

We suspect only a similar dynamic will help tame Tilray as well, although it’s unclear where that excess supply will come from.

Tilray Holds Cannabis Sector Held Hostage

It used to be that when Canopy Growth caught a cold, the rest of the sector sneezes. But with Tilray becoming a valuation equal and U.S. inflows darling, that isn’t necessarily true anymore. In fact, TLRY seems to be driving much of the sector price action recently, with today providing a textbook example.

The graphic above really says it all. HMMJ followed TLRY’s lead by gaping higher and grinding higher throughout the morning session. In the afternoon, HMMJ began showing relative weakness and crashed once TLRY started capitulating from the daily high. All told, the cannabis sector lost 1/10th of its value during the swoon, even though TLRY isn’t even a HMMJ holding. Clearly, the tail was wagging the dog in this particular situation, and several others throughout the past month.

As Tilray has gained more prominence, its influence is seeping throughout the sector. Today, that was a very bad thing.

Final Thoughts

With Tilray’s lockout period almost four months away, it’s hard to envision the status quo continuing into the new year. It’s likely the company will find raising capital or acquiring others using common shares difficult, and this lunacy is making the whole sector look bad. Already, CNBC and other media outlets are equating cannabis with bitcoin—and that’s not a healthy place for the sector to be. Tilray’s hi-jinx also opens up a whole host of potential unsavory outcomes, including potential Securities & Exchange Commission intervention and class action lawsuits from investors who’ve been parted from their money.

We hope there’s some palatable solution forthcoming, because the current situation in untenable. Perhaps TLRY’s price can stabilize long enough for the company to initiate a substantial capital raise, thus beefing up the tradable float until the share lockout ends??

Whatever the solution, it can’t come soon enough.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

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