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Why Tilray Sank Today

By Keith Speights - Dec 13, 2018 at 4:30PM

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Bad news for a rival pulled the Canadian marijuana producer down, too.

What happened

Shares of Tilray ( TLRY ) were down 10.8% as of 3:41 p.m. EST on Thursday after dropping as much as 15.5% earlier in the day. The only news for the Canadian marijuana producer was the formation of an international advisory board to provide guidance on the company's global expansion strategy. The board includes an impressive list of former government leaders from Australia, Canada, Colombia, Germany, New Zealand, Portugal, and the U.S. 

The announcement of the international advisory board should have been viewed positively by most observers. So why did Tilray stock fall? Probably the most likely culprit was a general sell-off in Canadian marijuana stocks after analyst Graeme Kreindler with Eight Capital slashed his price target for Aphria ( APHA ) from $22 in Canadian dollars to CA$7 (from $16.50 to $5.24). Kreindler also changed his rating for Aphria from buy to neutral.  

Marijuana plants growing in a greenhouse

Image source: Getty Images.

So what

Tilray's share price dropped even more than Aphria's did on the analyst downgrade -- at least for part of the day. You might wonder why. The reason Tilray stock responded so negatively is that its float is super-low. Because there are fewer shares available for trading, any sell-off of marijuana stocks tends to take a heavier toll on Tilray than on its peers.

It's important to understand why Eight Capital is more pessimistic about Aphria than in the past. Short-sellers alleged that the company bought international businesses at hyperinflated prices, with Aphria insiders profiting from the transaction. The company has denied these allegations, but the attacks have pummeled its share price.

No similar allegations have been made against Tilray. But like several of its peers, it has made international acquisitions. It's not surprising that investors could worry at least a little that some potential issues could be raised with the transactions of marijuana producers other than Aphria. Those worries could be totally unfounded, but with marijuana stocks trading at premium valuations, any hint of concern is cause for a pullback.

Now what

Expect continued volatility for Canadian marijuana stocks, especially for Tilray. The long-term picture, though, still looks quite good with the Canadian recreational marijuana market in its infancy and medical cannabis markets expanding across the world.

But the short term could be shaky for Tilray. Its initial public offering lockup period expires on Jan. 15, 2019. Company insiders will then be able to sell their shares. That will increase Tilray's float, which could lower volatility over the long run. But a significant sell-off would cause Tilray's share price to plunge.

If you're looking for marijuana stocks with great short-term and long-term potential, Tilray probably isn't your best choice.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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