Tilray Brands (TLRY -6.49%) is one of the most recognizable cannabis stocks on the market. In recent years, it has expanded into alcohol as a way to diversify its operations and stimulate its growth potential. Although it has been anything but a smooth ride for investors over the years, the stock has been picking up steam of late. Entering this week, the stock had more than tripled in just the past three months.
Investors have been flocking to the stock as hopes are high that U.S. President Donald Trump will push for a rescheduling of cannabis so that it's no longer classified as dangerous a substance as heroin or LSD. That's where Tilray, one of the most popular pot stocks on the market, has benefited from such excitement.
But that could be a costly mistake. And it's one that I've seen unfold multiple times in recent years. Here's why you will want to think twice about buying Tilray Brands right now.
Image source: Getty Images.
Rescheduling of cannabis in the U.S. doesn't help Canadian-based pot stocks
If the U.S. goes ahead and reschedules cannabis to a lower classification, from perhaps Schedule I to Schedule III, where it would be in the same category as ketamine, anabolic steroids, and testosterone, that would be a big win for the cannabis industry. But that won't directly help Tilray or any other Canadian-based marijuana company.
On one hand, rescheduling cannabis will help allow more research to be done on the product, and it can help U.S.-based companies save on taxes. But it won't permit Canadian producers to import cannabis into the U.S. That won't change until nationwide legalization takes place.
While some investors may be anticipating this will be the first step toward eventual legalization, it is by no means inevitable. Marijuana legalization would likely be a long and far more complicated process, and there's nothing to suggest that is going to happen anytime soon. In the past, there have been several efforts just to make it easier for cannabis companies in the U.S. to access banking services, and even that has stalled and proven to be incredibly difficult. Full-blown legalization is a whole other beast.
Tilray's business isn't in great shape
It could take years before the U.S. legalizes marijuana, if it does so at all. There's no guarantee it will happen, and investing in a stock such as Tilray based on those hopes could set you up for disappointment. The stock is up big of late, but investors who have been hanging on to Tilray for the past five years are still down close to 80%.
There have been cycles like this before where excitement builds, the stock rallies, and then eventually, reality sets in and the stock falls back down. And even if you're optimistic that legalization may take place in the next five to 10 years and you're willing to wait, there's the risk that a company such as Tilray may not be around that long.
The company has burned through about $95 million during the trailing 12 months just from its day-to-day operating activities. It continually incurs net losses, and at this stage, it's difficult to see a path to consistent profitability. Amid such financial woes and long-term uncertainty, this is an extremely risky stock to own.
Cannabis investors have better options to choose from than Tilray
If you want to invest in cannabis, a better option may be to invest in an exchange-traded fund (ETF) such as the AdvisorShares Pure US Cannabis ETF, which gives you access to U.S.-based cannabis stocks that will actually benefit from potential rescheduling of marijuana. Or you could simply invest in a top multistate operator such as Curaleaf Holdings.
Tilray, however, is full of risk, and although it has been red hot of late, I wouldn't be surprised if its share price comes crashing back down to reality in the near future. The recent excitement about cannabis rescheduling doesn't warrant this level of optimism.
