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DEA decision sends Tilray stock prices to all-time highs, but is the wild ride causing trader paranoia?

By Alexis Grace
Sep 21, 2018

Thursday was another crazy day for Tilray, Inc. (NASDAQ:TLRY), whose stock market activity since its July initial public offering has been an unbelievably wild ride. Still, surging 8 percent before reversing course to lose 18 percent was nothing like what the company did on Wednesday.

Wednesday’s trading session was the most cuckoo yet, experiencing massive intraday price swings. The insanity led to five trading halts, an action that U.S. stock exchanges have an authority to do in response to turbulent price swings, hectic trading due to intraday stock news (both positive and negative), and various other reasons that delaying trading activity might make sense.

[More Tilray: Tilray’s wild Wednesday, with trading halted five times, leaves many investors questioning marijuana stocks]

 

In Wednesday’s case for Tilray, trading halts were due to the extreme price swings, with the day’s price range wildly spanning from $151.40 to $300.00. Even after-hours trading activity was volatile, dipping down as low as $185.80 shortly after market close, but coming back up to around $235 pre-market at the time of this writing Thursday.

Tilray is a company that is particularly susceptible to stock price volatility. The combination of having only 76.5M shares outstanding (for comparison, Cronos Group (NASDAQ:CRON) has 176.9M shares outstanding, and Aphria has 232.4M) with a much smaller amount actually available for exchanging hands along with the now significant short selling investor interest without brokers having shares available to loan it, it means that company-related or industry-specific news can cause the price to bounce around substantially.

The relevant Tilray announcement for Wednesday's mania was mostly related to the U.S. Drug Enforcement Administration decision to allow Tilray to import marijuana product to the United States for medical research at University of California San Diego Center for Medicinal Cannabis Research. Tilray will work with the university to research the effectiveness of marijuana for neurological disorders, specifically focusing on a relatively common shaking condition, essential tremors. This will be the fifth clinical trial involving Tilray product, and clinical trials are a big focus within the company’s strategy.

[Marijuana stocks: Aurora Cannabis to move to US exchange by October says Cam Battley]

The combination of this decision and an optimistic interview with Tilray CEO Brendan Kennedy on Jim Cramer’s “Mad Money” show, saw Tilray open up 20 percent Wednesday morning. The share price continued to soar throughout the day, shooting up to an all-time high of $300 shortly before 3 p.m. EST, a 94 percent intraday increase and a 1,664 percent increase from its $17 initial public offering.

However, the highs must have felt a little too overwhelming for investors considering that a massive sell-off and short selling interest quickly ensued following that high, dipping it down from the $300 high to $231, then again all the way down to $151.40 before making a comeback before the market close to $214.06, a +38.12 percent return.

 

Pro-marijuana DEA decisions helping U.S. Cannabis stock growth, but Wednesday’s Tilray trading volatility highlights risks

Unlike Canada which has made medical marijuana use federally legal and will soon also legalize recreational cannabis use beginning in October 2018, any type of marijuana use is still illegal at the federal level in the United States. However, DEA decisions allowing research for medical marijuana use, such as the Tilray decision, are additional pro-marijuana industry moves to the United States. It could be foreshadowing marijuana legalization in the U.S., and this is creating ongoing optimistic stock trading amongst Tilray and other cannabis industry leaders.

[More on Aurora: Sources leak potential Coca-Cola - Aurora Cannabis deal; Coke denies]

However, except for Cronos Group (NASDAQ:CRON) which saw a +9.78 percent return in spite of the news of a class action lawsuit against the firm for large investor losses, the largest cannabis industry leaders did not react as positively to the DEA news Wednesday. Aphria Inc. (TSX:APH) (USOTC:APHQF) fell -7.89 percent and Canopy Growth Corporation (NYSE:CGC) fell -4.89 percent, for example. This has led to arguments of a cannabis industry bubble reminiscent of the dot-com boom.

Especially with Tilray, investors are betting on the bubble bursting. Since there isn’t enough supply of shares available to loan out for short selling the stock and there’s a massive demand to short sell, there have been reports of 450-600 percent APRs being charged by brokers to borrow against Tilray. About 34% of the shares are currently being shorted, and put option contract premiums are so high that put option buyers would need to see the stock price drop 50 to 60 percent for the contract to be profitable.

Based on this type of trade activity, it appears that Tilray stock price has gone too high and trader paranoia has set in to the investor class. Only time will tell if the negative investor sentiment will overpower the regulatory optimism from moves like this recent DEA decision, or if there is an imminent doom for a crash.

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