Tilray Stock: A Major Short Squeeze Is Underway

About: Tilray, Inc. (TLRY)
by: D. H. Taylor

Tilray stock  price is irrationally overpriced.

The lockup period for a major holder of the stock expires on January 15th.

Tilray stock remains lofted and this may be the case if none of the Privateer shareholders sell their stocks.

Some people love the smell of napalm in the morning; I love to sell Tilray (TLRY). There are a few companies on my 'short' list and Tilray has occupied the #1 spot for a few months. Coming up, there is a lockup expiration date where inside stockholders can exit their holdings; January 15th. While I do not necessarily think that those holding shares are going to sell everything they own, I do believe that there is absolutely no reason why Tilray stock is trading as high as it is. I have shorted the stock many times and regardless of the intent of insiders, the fact that the stock price may fall anyway could induce those insiders to protect their wealth and take profits, while there still are some. However, I am not so certain that the next move from Tilray lower is going to be from the freeing up of locked-up shares.

Here is the latest stock chart on Tilray:

TLRY: Tilray Stock (Please note: I entered my position on Wednesday the 9th. This article was written Thursday the 10 but due to editing was resubmitted on Friday the 11th)

I have spent a lot of time analyzing various cannabis stocks over the past two years. I have homes in both Denver, Colorado and San Francisco, California. I have had a front row seat to what the pot industry is capable of. I believe that pot stocks are going to be an excellent investment over the long-term. My plans are to hold on to these investments from anywhere between 10-15 years, if not longer. It is my belief that this industry, and specifically the medical marijuana segment, will be huge in the long run; I want to take advantage of that.

However, I have been exceptionally harsh of some of the previous irrational exuberance that permeated with investors in pot stocks leading up to the pot stock sell-off in October. I shorted many of those stocks that were overvalued. Tilray saw action from me on the short side several times. I did well. There is still a lot more to this potential move.

What is Tilray Worth?

In order to find out how much value Tilray brings to the table, you first need to ask very basic questions, such as how much cannabis can they produce? From that, what would be a reasonable profit and, by extension, valuation for Tilray?

Tilray has the capability of producing a mere 145,000 kilograms of cannabis per year - they are big, but nowhere near the likes of the biggest producers. The wholesale value of cannabis in Canada is $5.20 per gram. If the company produces 100% and sells that amount, they would earn $750 million for the year. If the company earns 17% net margins off of this revenue, and a value investor paid 20-times those earnings the company would be valued at ~$2.55 billion. There are currently about 75 million shares outstanding which would mean that the share price should be $34.00. Tilray is trading slightly more than double that at ~$80.00.

The lockup period expires next week

Tilray remains a lofted stock price. This may have to do with the fact that there are some 75 million shares outstanding and of those, only about 9m float; the rest are held within an investment group named Privateer. Those shares are locked up and unable to trade until January 15th; next Tuesday.

There may be a temptation for some to take profits at that time. But, I believe that would be a terrible idea. One of the reasons that Tilray's stock is lofted so much is because the float is so low. So, if you held the stock, why provide the fluid to push the stock lower?

In economics, we often talk about the Prisoner's Dilemma. Two people get arrested for a crime. If both snitch, they both get a pretty harsh sentence. If they both don't snitch, they get very lenient sentences. But, if one snitches, but not the other, then the first person gets off scot-free, whereas the second gets a massive sentence. However, they are separated and have no idea what the other is saying.

With Tilray, if all parties involved chat with each other and decide to not sell, the price of the stock will remain lofted. But, what if one of those collaborators sells just a limited amount to take profits? Is it possible that this could start a cascade effect and the stock sells off precipitously?

It is in the best interest for those holding their shares to do just that, hold their shares. But, greed is good. And, the price of Tilray is irrational; it should be half.

Ahhh... but, what about the new AB InBev deal?

Tilray and AB InBev (BUD) have partnered up to do an infused THC and CBD drink. Do you want my honest opinion on the latest and greatest super-deal from a major beer producer to partner up with a cannabis company? Here it is: Meh.

I often wonder about all of the analysis of stocks I read. When I do read these articles that get written, I am always left with one question when I am done reading the article: Has this person ever walked into a dispensary before? Ever?

I have walked into a ton of dispensaries throughout Colorado, and now California. Too many. I am always amazed at how they are all so different from each other and how many different products are available. And, I always ask certain questions of the proprietors and I tell them exactly what I am up to: Market research for purchasing shares of stock, analysis for articles and general knowledge.

Here is a shocker that may surprise you from one of my recent encounters in a dispensary. I asked the individual who owned the place how the CBD items were selling. He had no idea what CBD was. For the record, the AB InBev deal is for a CBD infused drink as well as THC infused drink. A lot of people that I know have heard of CBD but have no clue what it is.

I also ask how beverages sell. Generally, the stores say they do okay, but were not the best consumables sold - Gummies do the best. As it turns out, there are statistics that back up the limited knowledge of, well, statistical data.

Consumables in Colorado are only about 17% of the entire industry. So, AB InBev wants to do a CBD and THC induced beverage. The total for Colorado for 2018 is likely to be a record and hit roughly $1.5 billion in sales. That puts consumables at $255 million in total sales. Of that, I am betting - there are no statistics for this - that drinkables are only about 10% of the consumable market. Why do I bet this? Because I have walked into many, many dispensaries in Colorado. And, I ask questions. Lots.

So, if my non-scientific data analysis is correct then, the total beverages portion of Colorado's sales will be about $25 million. After it is all said and done, I don't think AB InBev could get above single digits in revenue from that market share - there are a lot of beverages on a lot of shelves already; ABInBev has a lot of work ahead of them. Given that, the revenue potential for this deal would be small from Colorado's perspective; $2.5 million.

But, that is Colorado's numbers. You can multiply those numbers by 7 to get the population from Canada given a linear coincidence. So, the revenue potential for the Canadian market would be all of $17.5 million, with about $3 million net revenue. There's not enough gas in the tank from this deal to warrant a stock price double the current valuation from the $34.00 to the actual $80.00 current share price for Tilray. Tilray is vastly overvalued.

Does all of this mean Tilray stock sells?

As I research some news bits for this article, there was a piece that scrolled across my app that said that borrowing for short sales of Tilray has spiked up some 900%. That is a lot of interest in selling the stock short. We won't know how many of the 75 million shares outstanding were borrowed and shorted for a bit of time as the data is delayed. My unscientific bet is that it is only a percentage of the 9m floating. But, if those short sellers already pushed the price up for borrowing so significantly as they did, wouldn't that have already sold the stock off? I can only rationalize 2 things from that: There were a paltry amount of shares available to short, or, there is more buying interest than selling interest.

If you are a believer that the stock in Tilray is going lower, as am I, then my suggestion is that you play the stock the way I play it by purchasing puts at-the-money and out of the money. I use a delta-neutral strategy. I go long the underlying and buy puts. If the stock drops, I add into the long spot position. If the stock goes higher, I sell my spot position.

The fact is, if the stock was set to go down, it would have. I have made money selling this stock short several times already. I watch this stock like a hawk wanting to sell it even more because I believe it is over-priced and over-hyped. But, just because I believe it should be lower does not mean the price of the stock will go lower. So, I have become smart about the stock with when and how to sell it short.

I am "long" Tilray via a delta-neutral trade @ $81.00 with a 1:2 ratio of long stock over long puts. I will add more long positions into the stock as it falls lower and exit when the long positions are profitable over the cost of the puts. I am holding this trade for one month and allowing for multiple moves up and down so I can continually develop the trade. However, if there is a significant move in either direction, I will exit when profitable.

I have done this trade multiple times. It has worked in the past and I believe this will play out the same way. After all, if the stock was going lower in a big way, it would have already.

Disclosure: I am/we are long TLRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long Tirlay with a delta-neutral strategy, buying puts at the money and spot with a 2:1 ratio. As price moves lower, my puts gain value but my spot loses, at a ratio, however. If the stock price moves higher, then my long spot earns money.