What happened
Shares of Tilray, Inc. (TLRY +0.00%) were up 13.1% as of 11:22 a.m. EDT on Monday. A subsidiary of Tilray, High Park Farms, announced earlier in the morning that it had received a cannabis sales license from Health Canada. This license allows High Park to sell recreational marijuana products once the Canadian adult-use market opens on Oct. 17, 2018.
So what
Receiving the cannabis sales license was good news for Tilray. However, it wasn't unexpected news. High Park Farms received its cultivation license in April 2018. It would have been much more surprising had High Park not also won the sales license.
Image source: Getty Images.
So why did Tilray's share price jump so much on an announcement that pretty much everyone expected? We have to look back over the last several weeks to make sense of today's big gain.
Tilray stock skyrocketed in recent weeks, driven higher by a short squeeze. A short squeeze occurs when short-sellers begin to cover their positions in a stock as it rises, which in turn creates buying pressure that causes the stock to rise even more. Sooner or later, though, this buying pressure comes to an end. When that happens, stocks often drop quickly. That's what we saw with Tilray.
But the underlying reasons short-sellers wanted to bet against Tilray haven't changed all that much. Even with a big decline, the stock still trades at a sky-high valuation. However, some investors also probably think Tilray can still go up, at least in the short term, with the opening of the Canadian recreational marijuana market in a few weeks and the potential that Tilray could be selected by a big company outside of the industry as its cannabis partner.
It seems likely that we're seeing a tug of war between these competing perspectives. And because Tilray has a low stock float, the marijuana grower's share price is even more volatile than most stocks would be.
Now what
Investors who jump on the Tilray train thinking that the momentum will continue could see their positions quickly drop in value if the train is derailed. If we're seeing yet another short squeeze -- and that's what seems to be the case -- a derailment is inevitable.
Tilray's business will likely boom over the next few years. The company should be among the biggest winners in the Canadian recreational marijuana market. It's in great shape to compete in international medical marijuana markets, especially Germany.
However, I think that Tilray's share price already reflects this growth potential and a whole lot more. My view is that investors are much better off watching Tilray's stock gyrations from the sidelines. Today's gain could very well only be a temporary one.
