Marijuana stocks are on fire, and it's certainly not hard to understand why. Euphoria is exceptionally high (pardon the pun) with Canada set to legalize the sale and consumption of recreational marijuana exactly five weeks from today. A legal weed industry is one that could bring in billions of dollars annually, which is a big reason why investors have pushed marijuana stock valuations into the stratosphere.
But, as you can imagine, no two pot stocks are alike. While some have simply risen with the tide, others have really stood out, perhaps none more so than medical cannabis producer Tilray (TLRY +0.00%).
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Tilray certainly hasn't struggled to make a name for itself in 2018. It became the first Canadian pot stock in history to go the initial public offering route on a reputable U.S. exchange in July, and then promptly skyrocketed more than 470% from its $17-per-share offering price in less than a two-month period. Suffice it to say, that's an easy way to win over marijuana stock investors.
These facts about Tilray are flying under the radar
While you can probably get a pretty decent idea of what Tilray is hoping to accomplish when the green flag waves in Canada by reading its first-ever quarterly earnings report released a few weeks ago, there are still things about the second-largest marijuana stock by market cap that most investors are probably unaware of. Here are three such facts.
1. Tilray is about more than just dried cannabis
Although most investors, and even Tilray, are focused on the massive opportunity at hand -- namely, the legalization of adult-use weed -- Tilray is about way more than just dried cannabis.
For starters, it offers a pretty diverse product line, with a strong focus on cannabis oils. Even though oils target a notably smaller pool of consumers than dried flower, it's a pool of consumers that expects to pay a higher price point. Oils aren't subject to the same commoditization concerns that have plagued dried cannabis in select U.S. states, like Colorado, Washington, Oregon, and now even California. Thus, Tilray's focus on oils should really be a boon to its margins.
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Tilray is also a processing company. Of the 912,000 square feet of space spanning four facilities that's expected to be complete by the end of this year, according to its prospectus filing in June, approximately 56,000 feet will be devoted to its High Park Processing Facility in London, Ontario. This facility will be devoted primarily to alternative cannabis products, including edibles, beverages, and vaporized oils, once these products are made legal (which is expected to happen sometime in 2019). By internalizing some of its processing costs, Tilray has another means of boosting its margins.
And lastly, you may not be aware of Tilray's efforts to advance the uses of medical marijuana in Canada and select foreign countries via clinical trials. In Australia, Tilray has partnered with the Government of Victoria to examine the efficacy, safety, and tolerability of cannabinoids in children with severe epilepsy. Also in Australia, it's partnered with the University of Sydney and the New South Wales Government to examine the efficacy, safety, and tolerability or cannabinoids in treating chemotherapy-induced nausea and vomiting. Should these studies pan out, it's an added revenue channel for Tilray.
2. Don't overlook the lock-up period
Another thing you may have overlooked with Tilray, since so many marijuana stocks simply chose to debut via a reverse merger in recent years, is the fact that it has a lock-up period expiration in just over four months' time, on Jan. 15, 2019.
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A lock-up period describes a contractual obligation by insiders of newly public stock (e.g., company executives and the board of directors) not to sell. Following an initial public offering, insiders are barred from selling any stock for a period of 180 days. That 180-day period ends on Jan. 15, 2019. While a lock-up expiration is historically a very short-term event, it also has the tendency to be a negative event for high-flying stocks, since it allows insiders to cash in some, or all, of their winnings.
Understandably, it's important not to overreact to the end of the lock-up period, because insiders sell shares of stock all the time for a variety of reasons. Sometimes it's just a matter of executing options before they're set to expire, or a matter of cashing out some of their holdings to cover a large federal income tax bill. In other words, insider selling isn't an automatic red flag. Nevertheless, with the lock-up period approaching, some turbulence is to be expected in Tilray's stock.
3. Red Rover, Red Rover, let Big Pharma come over
Finally, did you know that Tilray became the first marijuana stock in history to snag a partnership with Big Pharma?
In March 2018, Sandoz Canada announced its intent to form a strategic partnership with Tilray to sell co-branded products, as well as collaborate on research and development in an effort to get Tilray's products in pharmacies and hospitals throughout Canada. Sandoz is the generic-drug wing of pharmaceutical giant Novartis.
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Remember, for as juicy as Big Pharma's margins are, these are companies that are constantly living off of borrowed time given the finite length of branded-drug patents. By partnering with cannabis companies, Big Pharma would be giving itself an opportunity to not only boost its sales and profits, but also to remove some of the volatility associated with the patent cliff.
Beyond Big Pharma, tobacco and alcohol companies are also looking to partner with pot stocks. A good portion of Tilray's run higher is based on the idea that Tilray is a logical partner for one -- or all three -- of these industries.
Whether Tilray can maintain its incredible run is another story altogether, but it's clearly a more complex company than most investors realize.
