The marijuana sector experienced a wild ride on Wednesday, but none more so than Tilray Inc. (NASDAQ: TLRY). The Canadian cannabis and pharmaceutical company recently made history when American regulatory officials greenlighted Tilray’s intention to export marijuana into the U.S. for clinical research.
Prior to the approval, Tilray – which is the second cannabis producer to be listed on the Nasdaq – conducted research into marijuana’s effectiveness towards essential tremor in its home country, along with Spain and Australia. Now that the U.S. is finally warming to the idea of a fully-fledged medical-marijuana industry, TLRY stock understandably shot higher.
That said, cannabis investors are likely better served going with Tilray’s clinical-study partner Aleafia Health Inc. (TSXV:ALEF) (OTCQX:ALEAF). For starters, the price differential and volatility are glaring. TLRY jumped to $300 on an intra-day high before settling to just above $214. ALEAF, on the other hand, saw a high of $1.63 before closing at $1.45. (Aleafia Health Inc. formally Canabo Medical Inc.)
More importantly, ALEAF represents better value and is possibly more stable for the following four reasons:
Aleafia to Benefit from Natural Synergies with Tilray Without the Overhang
In August of last year, Tilray provided a research grant to Aleafia. The scope of the partnership involved Aleafia studying opioid usage and impact among medical-cannabis patients. Opioid-related deaths are a huge problem in both Canada and the U.S. Should the Tilray and Aleafia project uncover a viable path for cannabis to effectively replace opioid, it would launch both shares into low-earth orbit. (See study here. Bottom of page 12 http://www.wvc.biz/aleafia-initiation-analyst-report.pdf)
But with the lower price point and valuation for ALEAF stock, investors in the smaller partner will almost surely see far superior returns. Not only that, Tilray breaking through the legality wall in the U.S. could naturally (and cheaply) open doors for Aleafia. Since both countries have an interest in curtailing opioid deaths, an exemption for opioid-replacement therapy isn’t out of the question.
At the same time, TLRY is a risky venture for reasons which we’ll discuss soon. ALEAF stock allows investors exposure to lucrative synergies but without unnecessary market liabilities.
TLRY is Overvalued, while ALEAF has Room to Grow
Tilray just had its initial public offering two months ago. Since that time, TLRY blew up from a $17 cannabis IPO to well over $200. You don’t need to be a market expert to realize that a 1,159% move over a 60-day period is simply not sustainable.
You also don’t need to have special insight to realize that Tilray is fundamentally overvalued. The company is a money pit, ringing up $20.5 million in revenues but generating a loss of nearly $8 million last year.
Granted, that’s not an uncommon sight for marijuana stocks. However, Tilray also suffers from a very weak and unstable balance sheet. Management has very little cash to work with relative to its massive debt. Should the broader industry experience bumps on the road, TLRY could hurt.
ALEAF, though not perfect by any means, offers better optics. While net income is still at a loss, Aleafia is making significant progress towards future profitability thanks to strong sales growth. Better yet, the company has no debt on its books, giving management flexibility and a safety margin.
Technically, TLRY is on Extremely-shaky Ground
Whether you buy ALEAF stock or not, you absolutely must avoid jumping on the TLRY bandwagon blindly. What you may not know will very likely hurt you.
While some analysts may claim that Tilray’s rise in the markets results from fundamental catalysts, they’re probably wrong. Sentiment towards TLRY is artificially induced from a short squeeze. This phenomenon occurs when bearish traders buy back the stock they initially borrowed and sold to cover their position.
Essentially, it is a “reverse panic.” The situation is exacerbated by the fact that TLRY has a small float: only 17.8 million shares are currently available for trading. With such a skewed supply-demand matrix, TLRY will see extremely-volatile swings.
Although this circumstance won’t last long, Tilray, as previously mentioned, is fundamentally overvalued. In contrast, ALEAF features comparatively more reasonable trading patterns. Without the drama associated with Tilray, Aleafia’s price discovery is more natural and organic.
Broader Medical-Cannabis Trends Favor ALEAF stock
The legal marijuana industry has two factors moving in its favor. First, both Canadian and American sentiment for cannabis has generally shifted positively. Second, as evidenced by Tilray’s regulatory approval, weed may one day symbolize the future of medicine.
“Botanical” proponents call it Pharma 2.0. Already, we’re seeing several pharmaceuticals integrate cannabis into their clinical trials for possible pipeline development. And we’re not just talking about no-name entities. AbbVie Inc. (NYSE: ABBV) is a prime example of a renowned pharmaceutical that has successfully moved into medical marijuana.
In many ways, Aleafia offers the best of two worlds. On the scientific front, it has significant expertise in cannabis production and cannabis-related medical research. For the investor, ALEAF is a relatively undervalued stock with tremendous upside potential. It also has the rare benefit of a strong balance sheet.
No matter how you look at it, ALEAF is the better buy, either from a short-term trading window to a longer-term stake.
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