Cannabis stocks have been crushed, but are they now coming back to life? Down 68% year-to-date but up some 20% over the past few days, Tilray (NASDAQ:TLRY) seems to fit that description. However, Tilray stock isn’t necessarily the one that investors should be banking on.
Earlier this week, there was some chatter about a potential capitulation for the group. Given that we’re only a few days removed from a possible bottom, it’s impossible to say at this point if the decline has hit its maximum pain point.
That said, it’s been a horrendous ride — for all the pot stocks — and the recent rebound is relieving some of that pain.
The Problem with Cannabis Stocks
Have you ever heard the saying, “good company, bad stock?” It means that the fundamentals of the company are good — whether that’s the balance sheet, underlying business, etc. — but the stock acts like crap. It means even though the company is reporting solid results and good news, the stock just refuses to rally or recognize any of the positives.
If you take a second and think about some of your past or maybe even current holdings, I’m sure you can think of a few names that fit this description.
The problem with cannabis stocks though? They’re not good companies. And right now, they’re not good stocks either. Think of it this way:
When the technicals are bad, many stocks with strong underlying fundamentals can weather the storm better than the weak stocks. That is, those with dividends, strong balance sheets, a low valuation, and continued growth (and usually some combination of these attributes) are go-to picks for investors.
On the flip side, investors can overlook less-than-ideal fundamentals when the technicals are behaving well. Bad news gets shrugged off and the stock price continues higher. This was the cannabis space when these stocks were doubling and tripling.
However, when the fundamentals and the technicals turn south — like cannabis stocks over the past few quarters — that’s when stocks get obliterated.
When there are no fundamental attributes to support a stock, there’s no telling when it’s a buy. With traditional, established stocks, we have valuations, yields and other metrics to measure. With high-valuation cannabis stocks, we just have the technicals. And when they’re bearish, it’s hard to be bullish.
Don’t Go with Tilray Stock
So, what are investors supposed to do? When the tides do finally turn, investors will want to be established in those with the best balance sheets and fundamentals. In my view, those are names like Canopy Growth (NYSE:CGC) or Aphria (NYSE:APHA).
To another extent, Aurora Cannabis (NYSE:ACB) and Cronos (NASDAQ:CRON) are other possible choices. But TLRY stock just doesn’t have as strong of fundamentals. Others have received sizable investments from larger companies and/or have more stable businesses.
For Tilray stock, it’s just not there. The company has total cash of $122.3 million. That’s down more than 44% sequentially, although it is up slightly year-over-year.
However, current assets total just $330.6 million versus current liabilities of $130.2 million, while total assets of $1.04 billion outweigh total liabilities of $624.4 million. That may work for a company that is generating positive free cash flow and net income, but that is not the case with Tilray stock.
Analysts predict 304% revenue growth this year to $174 million and 78% growth in 2020 to more than $310 million. If achieved, that’s great news! But it will also mean that other cannabis companies will bask in the sun, and with their stronger balance sheets, they are in better position to survive.
Trading TLRY Stock
It’s great to see Tilray stock start to make a comeback — it’s great to see all of the cannabis space rebound. But that doesn’t make TLRY stock a buy.
This name has so much overhead resistance and various downtrends to push through, it’s not even funny. It’s poking through its first downtrend resistance mark (blue line) on Thursday, but still has the declining 50-day moving average to push through, as well as the $25 level.
I would feel more comfortable in some of the other cannabis stocks with stronger balance sheets. While the technicals are sloppy in these names as well, at least their fundamentals are a little better.
Admittedly, a close over $25 could ignite a rally up to the declining 100-day moving average for TLRY. However, a move below the $20 mark and/or downtrend support (purple line), and bulls need to use extreme caution.