How desperate have things become for cannabis stocks? Tilray (NASDAQ:TLRY) announced two new edible chocolate products on Dec. 22. TLRY stock jumped nearly 10% on the news.
I say desperate because the Biden administration’s announcement of 11 pardons for people convicted of marijuana-related offenses likely was the real reason for its share price moving higher. Investors are desperate for any indication that the federal government will move forward with legalizing cannabis.
While I’ve always liked Tilray CEO Irwin Simon (another Canadian) for his job growing Hain Celestial Group (NASDAQ:HAIN) over the 25 years he was CEO, he left a mixed legacy. He faces the same problem with Tilray.
In the top job since January 2019, Simon’s made lemonade out of lemons in the past two years, moving the company into the alcoholic beverage space (craft beers and spirits) to deliver profitable growth.
Quite simply, with Congress looking dysfunctional and former President Trump a real possibility for a second term in 2024, cannabis looks no further ahead than it was when Biden took office.
As a result, TLRY stock looks stuck in neutral, with few long-term catalysts to move it out of penny-stock status.
Is all hope lost? Probably.
The Optimists on TLRY Stock
The last time I wrote about Tilray was Nov. 11. I admitted that Simon’s diversification plan was generating scale but not profits. Add to that a Canadian market share lead that seems irrelevant given the amount of unsold inventory, and I’m left at a loss for a plausible argument why anyone should buy its stock.
Full disclosure: Three days earlier, I included it on a list of cannabis stocks to buy, prefacing my recommendation by advising anyone with a heart condition to avoid its volatility.
I recommended it for aggressive investors because the reward is much greater than the risk. Buying shares in Tilray is akin to buying lottery tickets. You probably won’t win big, but you might and you can’t win if you don’t buy.
Some of my InvestorPlace colleagues also have remained open-minded about Tilray’s future gains.
Faisal Humayun, like myself, sees the wisdom of its diversification into alcoholic beverages such as craft beer. It could generate more cash flow in 2024 as it cuts costs.
In mid-December, InvestorPlace’s Rich Duprey suggested the small-cap stock could strike gold with overseas legalization. For example, Germany is expected to legalize recreational use in the first half of 2024, giving Tilray’s European business a big boost.
I guess that’s what makes investing so interesting. While there is still hope for Tilray’s cannabis business, it never seems to stick around long enough to deliver meaningful results that investors can bite into.
Investors are from Missouri these days. Tilray has to show them that the potential in Germany is real.
A Possible Short Squeeze?
Duprey mentioned a possible short squeeze as a future catalyst for TLRY stock. In mid-December, 16% of its outstanding shares were shorted by investors.
That’s risen to nearly 17%, or 17.2% of its float, in the two weeks since; given a 65-day average daily volume of 16.3 million shares, it would take eight average trading days to cover all 125.22 million shares currently short.
How have the short sellers done in 2023?
According to September data from S3 Partners LLC, short sellers had lost $105 million betting against cannabis stocks through the year’s first nine months.
“If the rally was overblown or if these measures take longer than expected to come to fruition, we may see a future stock price weakness and an increase of short selling in the sector,” Bloomberg reported comments from Ihor Dusaniwsky, managing director of predictive analytics at S3.
Bloomberg reported that the MJ PurePlay 100 Index had gained 18% in the first 17 days of September. However, by the end of October, the index had lost all those gains. From November 1 through Dec. 27, it has gained 22%, suggesting the shorts will finish 2023 losing money on the year.
Tilray is the sixth-largest holding by weight. Since Nov. 1, it’s up 25%, putting an even bigger hurt on those shorting Tilray.
Can the hurt continue into 2024 for the shorts? It can.
In September, short seller Kerrisdale Capital released a report highlighting why it’s betting against Tilray. One of the biggest is the massive dilution it’s implemented to hide losses. It pointed out that a $24 million cash payment owed to a supplier turned into $100 million in stock issued by the company over the past two years to settle that debt.
Kerrisdale believes that if the company paid cash to the supplier, its 2022 earnings before interest, taxes, depreciation, and amortization would have been zero.
As I said in my Nov. 8 article, this supplier could have said no to stock payments, but it didn’t. That suggests it had no problem with the repayment terms, so why should Kerrisdale or Tilray’s shareholders?
Look, there has been considerable dilution to shareholders since the merger with Aphria in May 2021. To say it’s all to hide losses seems like a stretch. Tilray was trying to remain solvent like every other struggling cannabis company.
Rescheduling of cannabis in the U.S., while it won’t immediately help Tilray, should be enough of a catalyst to keep TLRY stock moving higher in 2024. That could be enough to get enough of the shorts to cover, causing a short squeeze.
However, let’s not kid ourselves; Tilray is for aggressive investors only.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.