These Marijuana Stocks Are Outselling Tilray

These Marijuana Stocks Are Outselling Tilray
The dot-bong bubble? Heres why the Tilray hype might burn out
NASDAQ-listed shares of the Nanaimo, B.C.-based cultivator touched US$300 on Wednesday, spiking more than 1,600 per cent above its $17 initial public offering price in July. The stock retreated to the $130 range in Fridays session. That pullback still leaves the companys market value roughly on par with Canadian Tire Corp. (CTC-A).

Greg Taylor, a portfolio manager at Purpose Investments, said Tilarys roller-coaster volatility is due in part to its tiny 10-million share float garnering big attention south of the border. He said that scarcity factor will be short-lived as more Canadian cannabis companies crowd onto U.S. exchanges.

The price spurt intensified because the market cap for the company was just $16.4 billion at end of trading. On top of this, a single private equity fund controls over 70% of the shares, further reducing the available stock. The entire market cap of cannabis shares is around $35 billion, so investors were chasing each other around a very small market.

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The interesting thing is that almost every other company that Im seeing listed in Canada is actively pursuing a U.S. listing right now, Taylor told Yahoo Canada Finance. I think the scarcity factor in the next month or two could go away as more companies work on switching to the U.S.

The financial markets were ablaze this week with high volatility in cannabis shares unseating cryptocurrency as the trade of choice. References to cannabis in news articles were almost double that of cryptocurrency. But big falls on Friday, coupled with almost unilateral gains across crypto, showed how schizophrenic the weed market can be.

Tilray has handley outperformed its two Canadian-headquartered, U.S.-listed peers – Canopy Growth Corp. (CGC) and Cronos Group Inc. (CRON) – in recent weeks. The company was the last of the trio to stage a U.S. IPO, luring retail investors anxious to get in on the ground floor of a large pot company while they still can.

It caught a lot of attention. I think what really set it apart was that it was a direct to NASDAQ IPO, which opened up the audience for it to get a lot bigger, Taylor said. Its sometimes difficult for Americans or global investors to buy on the Canadian exchange, especially the CSE (Canadian Securities Exchange).

Celebrated Bitcoin bull, Mike Novogratz, wanted a piece of that action, so managed to “get a borrow, short it for a day trade, make some money”. He believes that longer term, the marijuana industry has a promising future, but for now, it is all about short-selling.

Alberta-based Aurora Cannabis Inc. (ACB), which currently trades on the Toronto Stock Exchange, is reportedly pressing ahead with plans for a listing on a major U.S. exchange. Chief corporate officer Cam Battley told the Financial Post on Tuesday the company is targeting the month of October.

There are some who question Ripple’s surge 00, including Yahoo Sports, who compare its position to that of Tilray, midweek. Sadly, the hosted video doesn’t seem to match the headline, so we are left in the dark as to why Yahoo make that comparison.

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They are absolutely seeing this, Taylor said, referring to other Canadian companies watching Tilrays headline-grabbing U.S. market movements.

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The Purpose Marijuana Opportunities fund participated in Tilrays IPO, led by New York firm Cowen and Company in July, selling the last of its shares a few weeks ago at $85.

Listen, the weed business has a great underlying story, a lot like cryptocurrency. In five or six years, we will have a monster weed business.

Taylor continues to heap praise on the companys operations. The decision to sell, he said, was purely a function of Tilrays soaring valuation. He recently joked that he would have to throw away his CFA to value the company at $7.5 billion, based on 20-times projected 2020 sales.

Sure enough, price drops across Thursday and Friday saw Tilray close the week at around the same point it started it.

It got well above our target range for valuation, he said. I think a lot of dedicated marijuana investors and institutions that are allowed to invest in it have been trimming or are completely out. They were out before $100.

Are cannabis stocks behaving similarly to the cryptocurrency market right now? Share your thoughts below!

Taylor noted that a recent appearance by Tilray CEO Brendan Kennedy on Jim Cramers widely-followed CNBC show Mad Money  helped to drum up a U.S. retail investor interest following.

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In the Sept. 18 interview, Kennedy boasted that investing in cannabis companies is a great hedge for pharmaceutical companies, given the drugs disruptive potential in the medical field.

The crazy trading this week around Canadian pot stock Tilray should not be viewed as typical for investors who want to put money into the industry, Bruce Linton, CEO of rival Canopy Growth, told CNBC on Friday.

Tilray announced a strategic partnership with Sandoz Canada Inc. in March, the first deal between a major pharmaceutical firm and a Canadian pot producer. On Tuesday, Tilray announced approval from the U.S. Drug Enforcement Administration to import pharmaceutical-grade medical cannabis for a clinical trial.

Shares of Tilray, which have been captivating Wall Street this week, had another roller-coaster ride Thursday, eventually closing down more than 17 percent, with a market value of about $13.5 billion.

In the CNBC interview, Kennedy pegged the value of the global medical marijuana industry at US$100 billion, and talked up Tilrays recreational ambitions beyond Canada.

Taylor is among the chorus of observers comparing the frenzy around marijuana stocks to the dot-com crash.

During the regular trading day Wednesday, the stock was halted five times by the Nasdaq, rising as much as 90 percent and briefly turning negative before closing up 38 percent.

As Tilray shares crested over $200, he said the stock is starting to look like one of the greatest mania stocks I have ever witnessed, and I was hired to manage dot-com companies in the 90s.

There are about 76.5 million Tilray shares outstanding, but the float — those shares actually available for trading — is just 17.8 million, according to FactSet.

Weed stock Tilray is on a wild ride

Coming out of this euphoria phase, we are going to have some global players, Taylor said. But I think it is still too early to say which are going to be the Amazons and Googles, and which are going to be the Pets.coms.

In an up-and-down week, Canopy shares rose 11 percent as of Thursdays close, with a market value of nearly $12 billion. The stock was under pressure early Friday.

Gone are the days when it was notable for Canadian cannabis stocks to swing 10 per cent in a single trading session. Volatility has given way to chaos and inexplicable, manic activity in pot shares.

Linton said shares of Ontario-based Canopy Growth, with 228.5 million shares outstanding and a float of about 201 million shares, trades “relatively normal.”

Exhibit A is Tilray Inc.s performance this week. With little more than US$20-million in revenue in 2017 and no indications that it will be profitable any time soon, the Nanaimo, B.C.-based cannabis producer went public on the Nasdaq at US$17 a share in July. By Tuesday, the stock was at nearly US$155.

By midday Wednesday, its shares had rocketed to US$300 – marking a 17-fold increase from the IPO price. And then it crashed, closing the week at US$123.

“I suspect [Tilray trading] will return to normal. Theyre a nice business. They have a nice start,” Linton said on “Squawk Box” on Friday.

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At its Wednesday peak, a company that few investors had even heard about two months ago was suddenly worth $36-billion, more than Sun Life Financial Inc., Loblaw Cos. Ltd and all but 17 publicly listed Canadian companies.

“I think it got technically weird,” said Linton, referring to the wild swings in the U.S. shares of British Columbia-based Tilray.

Its a complete mania, total insanity, said Stephen Takacsy, chief executive of Montreal-based Lester Asset Management.

Linton attributes the Tilray moves, in part, to the “very limited trade available in the total number of shares in the float.”

Tilray shares slide as pot companys wild ride persists – Article

It also marks a dramatic pivot. After a correction earlier this year, marijuana shares drifted sideways for a while – until Aug. 15, when alcohol giant Constellation Brands Inc. announced a multibillion-dollar investment in Canopy Growth Corp. The news sparked a huge rally, as investors became convinced that even more blue-chip consumer companies would move into the sector, via takeovers or joint ventures. Early this week, renewed speculation that Coca-Cola Co. was interested in pot-related beverages helped boost shares of Aurora Cannabis Inc. by 17 per cent.

However, a “relatively normal” trading pattern surrounding marijuana stocks is certainly in the eye of the beholder.

At the same time, the bloated valuations are being justified by a belief that some Canadian producers will dominate the world. It used to be that investors here would pile into a companys shares based on domestic announcements, such as the news of a contract to supply a large Canadian retailer with medical cannabis. Today, so much excitement is tied to export potential.

Shares of Tilray, which have been captivating Wall Street this week, had another roller-coaster ride Thursday, eventually closing down more than 17 percent. Tilray was under severe pressure in premarket trading on Friday and opened 20 percent lower.

It is this sentiment that sent Tilray shares through the roof. On Tuesday, the company announced it had received a rare approval from the U.S. Drug Enforcement Agency to export a capsule form of one of its products for a clinical trial to treat a neurological disorder. Even though it was an incremental development, investors got excited about the possibilities and convinced themselves the company had cracked a complicated nut and found a way to break into the U.S. market – a feat that has evaded most Canadian companies because cannabis is still illegal there under federal law (although has been legalized in a number of states).

Shares of marijuana companies have been booming recently, in the run-up to Canadas legalization of recreational-use on October 17. But Cramer, the host of “Mad Money,” said next month will instead be a “sobering moment” for pot stocks.

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Amid the hype, nearly 32 million Tilray shares traded on Wednesday, meaning each share traded hands on average three times over the course of the day (the company has a little more than 10 million free-trading shares, or float). At its peak, Tilrays stock traded at 62 times estimated 2019 sales. Almighty Inc., by comparison, trades at 3.3 times the same years sales, while Facebook Inc. trades at 5.7 times.

The promise of the marijuana industry cannot compare to what the internet had to offer during the 1990s dot-com boom and bust, Cramer said Thursday on CNBC. “But the investors [now] are trading like the dot-com.”

Tilray is the most extreme example. It isnt alone. Euphoria has spread across the sector, and since the day of the Constellation investment, the Horizons Marijuana Life Sciences Index, which tracks the Canadian cannabis sector, is up 71 per cent. These valuations, coupled with frenetic buying and selling, have spurred comparisons with the dot-com frenzy that captivated market watchers in the late 1990s – before it all came crashing down.

Back in the dot-com days, it was very much the same. If you were making money, it was actually a negative – because you werent growing as fast, said Peter Hodson, who runs 5i Research, an independent research shop. That can last for a while – it just doesnt last forever.

During the regular trading day Wednesday, the stock was halted five times by the Nasdaq, rising as much as 90 percent and briefly turning negative, before closing up 38 percent.

Yet, no matter how much investors are warned about the inevitable correction, many remain transfixed by the opportunities.

Tilray, a Canada-based cultivator that markets, develops and distributes marijuana products, aims to be “a global company” that “dominates part of [the] $150 billion industry.”

The cannabis industry is backed by some institutional money, notably Canadian hedge funds such as K2 & Associates, MMCap Asset Management and Anson Group. But enthusiasm among Canadian retail investors help catapult the industry this far.

Richard, a retired postal worker in Elora, Ont., said he has made about $2,500 since December on an initial $5,500 investment in his tax-free savings account. It was never intended to be a long play, said Richard, who spoke on condition his last name not be used. Im not an expert of course, but I feel that Ive done quite well. If Im playing with money that is more or less profit, if I can put it that way, Im not so hurt by taking a kick in the nuts.

Cramer said Thursday theres nothing in terms of company fundamentals or industry trends to justify the dizzying moves in pot stocks this week.

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In January, enthusiasm from do-it-yourself investors was so intense that online trading platforms run by some of the countrys largest financial institutions broke down. The interest in cannabis stocks overwhelmed servers, leading to brief outages at discount brokerages run by the likes of Royal Bank of Canada and Toronto-Dominion Bank.

Fuelling investor interest was an intense level of promotional activity among companies. To stand out in investors minds, companies routinely send out news releases touting even minor corporate developments – a ploy even corporate peers are now railing against. This, too, has echoes of the dot-com era.

Im disgusted sometimes when I read some of these press releases, Aphria Inc. CEO Vic Neufeld said in an interview in late January, adding that some companies put heavy spin on their production or marketing prospects, simply to garner attention.

Investors piling into pot stocks this week are making a huge mistake, CNBCs Jim Cramer warned on Friday.

Nonetheless, promotional buzz has undoubtedly helped to boost. So, too, has the perception the industry is going to evolve away from its domestic focus and begin selling in other countries, particularly in Europe, as cannabis legalization sweeps across other regions.

Aphria was one of the first to talk this way. In Jan. 29, it struck a deal to buy Nuuvera Inc. for $826-million. Even though the target had only been a public company for four weeks and had never turned a profit, it had a small but growing presence in Europe – and, most importantly, was in the running to win a lucrative licence to grow cannabis in Germany.

Make no mistake, there is a global secular trend toward more cannabis consumption, Nuuvera CEO Lorne Abony said on a conference call. It is no longer a question of if. Its a question of when.

Cannabis is still illegal in the United States under federal law, even though a number of states have legalized marijuana. But Bruce Linton, the co-founder and CEO of Canopy Growth (CGC), told CNNs Julia Chatterley on the First Move show Friday that he thinks some of the laws prohibiting marijuana could soon be relaxed.

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Soon, the whole sector was on board and the messaging only grew more intense. When Aurora Cannabis acquired MedReleaf for $3.2-billion in May, a deal that would combine two of Canadas most prominent cannabis companies, Aurora CEO Terry Booth justified the expensive transaction to investors by stressing the need for scale amid surging global demand. Its not even a hockey stick, he said on a conference call, referencing a type of demand that moves sideways on a chart until it suddenly picks up at a sharp angle. Its straight through the roof.

Shares of tiny New Age Beverages (NBEV), a maker of trendy Kombucha drinks, has soared more than 300% in the past five days — including an 80% pop Thursday — after the company said last month it would debut CBD infused drinks. CBD is cannabidiol, a non-psychoactive component of cannabis.

To meet this expected demand, companies started touting some massive production facilities. Aurora is building a new flagship facility, dubbed Aurora Sky, near the Edmonton airport that is expected to yield 100,000 kilograms of cannabis a year when it is finished in 2019.

Still, it wasnt until Constellation made its big investment in Canopy that investors truly believed. In that instant, everything changed. Here was one of the worlds biggest alcohol companies betting on Canopys global growth potential – and Bruce Linton, Canopys CEO, told the market to expect more deals.

Canopy is one of several pot stocks that have been on a tear in the past few months. Tilray (TLRY) and Cronos (CRON) have both surged because investors are betting on a big boost in sales as Canadas legalization of recreational marijuana draws closer.

Within 18 months, he said on a conference call, the major marijuana players wont be any of the cannabis names that are started up in Canada. It will be Big Pharma. It will be other packaged beverage [companies] … a day doesnt go by that somebody doesnt send me an article that the Wrigley family are looking at this, everybody is looking at this.

Tilrays CEO suggested on CNBC that cannabis made sense as a hedge for beverage makers and pharmaceutical firms. Another Canadian pot company, Aurora Cannabis (ACBFF), has surged this week on speculation it could do a deal with Coca-Cola (KO).

The sector has gone haywire since – and now, it seems, U.S investors are intrigued. On Tuesday evening, Tilray CEO Brendan Kennedy appeared on the popular CNBC show Mad Money with Jim Cramer to share the same message as Mr. Linton. But because only a handful of cannabis stocks are listed in the United States, largely thanks to the federal ban, American investors have few ways to play the sector.

Canopys Linton agreed the major drug companies and beverage producers must have a cannabis strategy. He argued these industries cant ignore pot, and Constellation is ahead of the curve.

The result: Tilray shares swung so wildly the day after Mr. Cramers show that market regulators had to halt the stock five times to let cooler heads prevail.

Even DavidsTea (DTEA) — a Montreal-based company — has gotten caught up in the pot frenzy. Shares surged 12% Thursday on speculation that it could make a play for the marijuana market.

So marijuana shares are on a rapid upward trajectory again, just as they were before the January correction. And this time around, it is arguably even harder to convince investors that valuations are frothy. Because so much money has already been made, both before and after the correction, any naysayers are more likely to be thought of as haters – no matter how logical their arguments are.

Still, more big beverage companies — and even drug makers — may invest in cannabis as a result of the Constellation-Canopy deal. That could make the pot stocks a better long-term bet.

Yet, the reality is that even industry insiders who want the sector to succeed are skeptical of whats happening now.

But New Age Beverages, DavidsTea and Tilray plunged Friday as some investors fear that the pot stock craze could be a bubble. Canopy and Cronos also took a hit Friday.

Kris Krane is the president of 4Front Ventures, a U.S. consultancy, and serves on the board of directors of the U.S. National Cannabis Industry Association. A hater he is not. Yet, he is concerned about this growing consensus that Canadian companies will be the only ones capable of supplying the world with weed.

Shares of Canopy Growth have soared since Corona owner Constellation Brands said last month it was spending $4 billion to boost its stake in the company.

I dont want to discount the advantage that Canadians have. They have an incredible head start, he said, acknowledging that recreational legalization here has created a groundswell of energy. But he cautions that its far too simplistic to assume the next step is global domination.

But he warned that the United States is “still a no fly zone” for marijuana sales as long as it remains federally illegal.

The notion that Canadian companies are the only companies that can and will be able to do this is nonsense, he said. Theres no reason to believe American companies wont be incredibly competitive on global markets.

Of course, U.S. pot producers cannot export at the moment, because of the federal ban, but no one seems to know if that will last. And if the ban is lifted, it is a whole new ball game. California legalized recreational cannabis at the start of the year and its economy and population are roughly the size of Canadas. The state is also situated on coastal water, which makes export easy.

Mr. Krane is particularly suspect of the prospects for growth in Europe. For all the hype around medical marijuana on the continent, the market there is still in its infancy. While a number of Canadian companies tout the massive potential, Im much more realistic about whats going on, he said, having attended the International Cannabis Business Conference in Berlin this spring. At the moment, these are really, really tiny programs.

While there is potential for growth, it probably will not be, well, straight through the roof. With a population of 83 million, Germany is seen as the most lucrative market on the continent, yet early this year the government put a chill on the sector by cancelling its process to grant licences for domestic cannabis cultivation.

The news put Aphria, for one, in a tough spot. The company had just spent almost a billion dollars to buy Nuuvera, but the gem of the deal was the potential for German licensing and that went up in smoke.

Still, retail investors remain dazzled by projections of growth of cannabis consumption in Canada, as new consumers are drawn in and existing users switch from the black market to legal operations.

According to Statistics Canada, 5.4 million Canadians will likely be purchasing cannabis products once recreational use is legalized in October, assuming that about a quarter of users will continue to buy from the illegal market. The legal market translates into an annualized spend of between $3.8-billion and $4.8-billion.

Will producers be able to meet this demand? This is where investors get giddy. CIBC World Markets estimates that producers are currently producing about 350,000 kilograms a year but will have to meet demand of 850,000 kilograms by 2020, implying big growth ahead that will power industry revenues.

Its been very difficult for us to get our heads around this sector, where there is a lot of speculation built into how big the sector will be. We have estimates of demand, but they are only estimates, said Michael Willemse, senior research analyst at Toronto-based Taylor Asset Management.

He pointed to the situation in California, where legalization is already disappointing earlier projections. According to New Frontier Data, which analyzes trends in the global cannabis industry, expected revenue from legal marijuana sales in the state will be US$1.9-billion this year, half its earlier estimate.

Similarly, its estimate for 2025 consumption declined to about US$4.7-billion, down from US$6.7-billion. The new estimates factor in weaker medical marijuana demand and now assume that fewer consumers will switch from the black market to legal sources.

The prospect of more investments from global beverage companies isnt a sure bet, either. At these prices, it would take some serious gall to copy Constellations playbook and invest heavily in a Canadian cannabis producer. Instead, global giants may opt for joint ventures akin to Molson Coors Brewing Co.s partnership with Quebecs Hydropothecary Corp., since renamed Hexo Corp., to develop non-alcoholic cannabis-infused products. By going this route, the behemoths can put much less capital on the line.

And then there are the changing dynamics of the domestic market, which can easily be overlooked amid all the global hype. In Canada, a lot is still in flux, said Daniel Goldberg, CEO of Good & Green, an Ontario-based producer.

The ground rules and competitive forces in the Canadian industry are hardly set in stone with legalization just four weeks away. Regulations keep changing, and the impact of major developments such as allowing outdoor growing have barely been seen yet.

Success will depend of how companies master these domestic challenges while simultaneously casting their eyes elsewhere, Mr. Goldberg said. Melbourne and Berlin may have to take a back seat to Mississauga and Brantford[, Ont.] for a change.

Will any of these risks cool off the sector? Given investors propensity for riding bubbles – the dot-com hype, the commodity supercycle, and so on – the answer is, probably not yet. The fear of missing out is real.

But take it from Peter Hodson, who spent years as a portfolio manager at Sprott Asset Management before moving into research and who has lived through multiple market bubbles: Timing the top is next to impossible. And if youre invested when the market turns, it can get ugly – fast. Id rather miss some or all of the party and skip the hangover, he said.

Things got so crazy this week that even Mr. Cramer, the host of Mad Money, had to walk back his support for the sector two days after having Tilrays CEO on the show. On Thursday evening, he cautioned that people are way too excited about pot stocks. This whole group has gotten too hot – no argument here, he said. Is it a bubble? Absolutely.

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