In case you haven't noticed, marijuana stocks are blazing hot, once again.
After a brief lull during the first half of the year that saw the North American Marijuana Index -- an index comprised of growers, ancillary players, and cannabinoid-based drug developers in North America -- fall around 40%, the industry has been unstoppable since early August. Over the trailing year, the North American Marijuana Index has tripled, and it's up nearly 800% since February 2016. Wall Street and investors have been enamored with the prospect of recreational weed's legalization in Canada in 26 days, as well as recent dealmaking.
10 reasons Tilray can't be stopped
However, one marijuana stock has stood head and shoulders above its peers in recent months: Tilray (NASDAQ:TLRY). Since pricing its common stock at $17 per share on July 18 for its initial public offering on the Nasdaq, shares of the company have rallied by more than 810%, through Tuesday, Sept. 18. It's almost reminiscent of the gains investors witnessed following IPO's prior to the dot-com bubble. With a market cap of more than $14 billion, Tilray now dwarfs all of its peers.
So, what is it that's propelled Tilray to such massive gains in such a short period of time? Don't look to just any one particular event. Instead, it looks to be a confluence of 10 factors.
1. Canada's adult-use legalization
I know, "Thanks, Captain Obvious." But the most logical reason for Tilray's rally is the upcoming waving of the green flag for recreational weed on Oct. 17. This budding market could add $5 billion a year once it's fully ramped up, and as you'll see in the following point, Tilray is expected to be one of a handful of major players in the space.
2. Tilray's capacity potential
According to the company's S-1 prospectus filed with the Securities and Exchange Commission in June, it expects to have 912,000 square feet of growing and processing capacity spanning four facilities completed by the end of this year. More than 850,000 square feet will be devoted to growing. However, it has the potential to essentially quadruple its growing capacity based on the land it has available, meaning it could easily become a top-five producer by the end of this decade.
3. Tilray's history and brand-name appeal
Another reason we could be seeing Tilray rally as much as it has is the fact that it's a well-known and trusted medical cannabis name. It was one of the first growers to be given a cultivation license by Health Canada, and it has numerous well-recognized brands. Though we're talking about an industry that could have hundreds of products competing for shelf space. Tilray is one of the few exceptions to the rule where branding won't be a challenge.
4. A lack of bought-deal-based dilution
One of the more interesting decisions about Tilray choosing to IPO on the Nasdaq rather late in the game is the fact that it was able to raise money via a Series A financing prior to its IPO, and from the offering itself. This means Tilray is well funded and hasn't had to turn to dilutive bought-deal offerings (at least not yet) like all of its peers. Without any substantive dilution, shareholders are clearly looking like winners.
5. No insider selling
Don't overlook the fact that Tilray is still within its lock-up period of 180 days, which ends on Jan. 15, 2019. Put simply, this lock-up period disallows insiders, such as executives and board members, from selling any shares of Tilray. Despite the run-up, insiders have no choice but to hang on to their shares. That's probably been a calming influence for investors.
6. Exceptionally high short selling costs
Betting against Tilray's stock has also been virtually impossible. The borrowing costs to short sell shares of Tilray, should you be able to borrow shares from your brokerage, are running about 370% per year, according to financial analytics firm S3 Partners. That's an insanely high borrowing cost for an exceptionally volatile stock. Not to mention that the option's contracts aren't any better, with out-of-the-money premiums in nosebleed territory and traders expecting heightened volatility.
7. A first-of-its-kind export deal with Germany
In terms of tangible news, Tilray announced last week that it became the first cannabis grower to get the OK from Germany to export dried cannabis and cannabis oils to the country. In terms of foreign markets, Germany is leading the charge on the medical side of the equation, so Tilray having a first-mover advantage certainly could wind up putting a few extra dollars in its pockets. Once again, don't overlook the history and branding power of Tilray, which may help it secure first-mover status in additional countries.
8. An import deal with the U.S. for medical cannabis research
Sticking with news events, on Tuesday, Sept. 18, Tilray announced that the U.S. Drug Enforcement Agency had granted the company approval to import pharmaceutical-grade cannabis into the U.S. to run a clinical trial for essential tremor at the University of California, San Diego. Investors may forget that Tilray is conducting around a half-dozen clinical trials around the globe for medical marijuana, which could eventually help bolster sales of its product.
9. Dealmaking speculation
Undeniably, Tilray has skyrocketed higher on speculation that it would be the next pot stock to attract a beverage, tobacco, or pharmaceutical partner (albeit it already has a pharmaceutical partner in Novartis' generic drug wing, Sandoz). Following Molson Coors Brewing Co.'s joint venture announcement with HEXO Corp. and Constellation Brands' massive $3.8 billion equity stake in Canopy Growth Corp., investors view it as just a matter of time until Tilray lands a major deal of its own.
10. Investors' emotions
Last but not least, don't underestimate the power of emotions from short-term traders. Even though yours truly has chimed in by suggesting that Tilray is "grossly overvalued," it was John Maynard Keynes who once said, "The market can remain irrational longer than you can remain solvent." Momentum here has simply been unstoppable. Though I stand by my words that Tilray is overvalued, I have no clue when this momentum will wane.