Volatility Takes Front Seat in Marijuana Market
This is individual research and does not constitute investment advice.
I believe investing is ultimately about trends.
There are cyclical, economic, emerging, seasonal, Kitchin, Juglar and Kondratiev waves. There are bull and bear markets. There are new industries and technologies to embrace as well as dying ones to avoid.
There are also herd mentalities to recognize at market tops and bottoms.
I’m a strong believer in volatility. That’s my bread and butter. And I think it’s the greatest wealth generator the market can offer.
If you accept volatility into your life, act aggressively at lows and practice caution at highs, you’re going to be a successful investor.
Right now, I’d practice caution…
Especially when it comes to the market’s newest darling.
Now, I’ve long stated that the cannabis sector would be the hottest of the year. In January and February, following the start of California’s first legal adult-use sales, pot stocks were all the rage.
Then there were several months of tough going. U.S. Attorney General Jeff Sessions rescinded some Obama-era memos about the federal government not encroaching on states’ rights… And the start of the Canadian nationwide recreational market was pushed from July to October.
The bears jumped on this, and pot stocks had a difficult time.
In mid-August, as you know, cannabis stocks bottomed out. And they’ve since been on a tremendous tear.
One in particular has stood out above all others… Tilray (Nasdaq: TLRY).
But now alarms are going off…
Tilray IPO’d at $17. On its first day of trading on July 19, shares opened at $23.05.
This week, those shares were now at $230.
That’s a gain of 897%!
That’s fantastic. But it’s time to pump the brakes.
In less than two months, Tilray has catapulted to a market cap of more than $20 billion.
That means it’s now more than twice the size of Alaska Airlines (NYSE: ALK), Harley-Davidson (NYSE: HOG), Domino’s (NYSE: DPZ), Macy’s (NYSE: M) and Whirlpool (NYSE: WHR).
It’s now three times larger than Columbia Sportswear (Nasdaq: COLM), Dunkin’ Brands Group (Nasdaq: DNKN), Hanesbrands (NYSE: HBI) and Owens Corning (NYSE: OC).
It’s now five times the size of Under Armour (NYSE: UAA) and World Wrestling Entertainment (NYSE: WWE).
More importantly, it’s double the size of Canopy Growth Corp. (NYSE: CGC).
In Tilray’s second quarter earnings release, revenue grew 95% to $9.7 million. It sold 1,514 kilograms at a range of $6.20 to $6.38 per gram.
I know the markets are forward looking, but the current $20 billion valuation is too much.
I’m friends with a lot of traders and investors. They’re all saying, “It’s free money! It’s too easy!”
That brings us to what really concerns me…
This is Tilray’s price chart since mid-month. There were a couple of announcements that triggered spikes. But the trading on September 19 should sound warning bells for all cannabis investors.
On that day, Tilray’s shares surged 93.6% to a peak of $300.
They then tumbled all the way down to $151.40. That collapse took just 45 minutes, from 2:45 p.m. to 3:30 p.m. Shares finally ended the day up 38% at $217.
But not before they halted five separate times because of the volatility.
That chart alone should have investors taking a step back.
Wall Street’s reefer madness with Tilray has already begun to unravel… and rapidly.
Since hitting $300, shares have tanked during the following trading sessions, losing 58.3% of their value.
Beyond that, also on September 19, the popular zero-fee trading app Robinhood had to halt new orders for Aurora Cannabis (TSX: ACB; OTC: ACBFF). It couldn’t support the volume of orders received. Aurora is the 16th most popular stock to hold on the app.
What we’re seeing are the dangerous hallmarks of irrational exuberance.
The speculation is fed by news of price increases that ignites investor enthusiasm, which spurs prices higher and draws more investors in as share prices continue to swell.
The value of the investment – the reality – is no longer important.
The gambler’s mentality takes charge, goaded on by the envy of other investors’ successes.
Headlines are now touting the new billionaires minted by the cannabis surge. That’s only going to add fuel.
I believe in the future of the cannabis market.
I believe the potential exists.
But this is a situation where investors need to practice caution and be wary. When Tilray collapses – and I believe it will – it’s going to affect the entire cannabis sector.
It will be a bomb that reverberates throughout the entire industry.
So don’t get overweight… especially in one position. Have an exit strategy, either a hard stop or a trailing stop. And above all, don’t chase the rabbit; let it come to you.
Volatility is the greatest wealth generator the market has to offer. But you don’t want to get trapped on the wrong side.