Here's Why Tilray Is Tanking Today

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What happened

What a wild ride it's been for Tilray (NASDAQ: TLRY). After jumping as much as 14% in early trading, shares of the Canadian marijuana grower were down 22.5% as of 12:05 p.m. EDT on Thursday. Tilray didn't make any announcements, so what led to the big drop? It's quite possible that we're either seeing investors take profits off the table or maybe the winding down of a short squeeze.

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So what

It would make sense that some investors could be selling Tilray to lock in profits. Before today, the stock had racked up a gain of 540% in just the last month. Tilray enjoyed a big jump this week after its CEO appeared on CNBC talking about how there could be "multiple hundred-billion-dollar companies" in the cannabis industry in the future.

It would also make sense if today marked the end of a spectacular short squeeze. All of the ingredients of a short squeeze were present for Tilray: heavy short interest, several rounds of positive news, and a massive melt-up. Short squeezes don't last indefinitely, though. And when they end, it's usually not good for the stock that initially captured the attention of short-sellers.

Traders are concerned with quick profit-taking and short squeezes, but long-term investors aren't. The problem for long-term investors with Tilray is that the prospects for its business appear to have become disconnected from its share price. All of the gyrations that Tilray has gone through -- both up and down -- over the last few days have been less about its business prospects improving and more about wild speculation over the stock.

Now what

Volatility is likely to be the name of the game for Tilray for the immediate future. Part of the problem is that the stock's float is only around 17.8 million shares. That's way below the float of Tilray's peers. Because Tilray's float is so low, any significant buying or selling pressure can cause major moves in its share price.

Aside from this volatility, though, I think there are three things for investors to watch with Tilray over the next few months. One is the opening of the recreational marijuana market in Canada, which should be good news for marijuana growers like Tilray. Another is what happens next with big companies outside of the marijuana industry selecting cannabis partners. Tilray is likely to be a top candidate for a partnership.

The last thing to watch for is the expiration of the initial public offering (IPO) lock-up period for Tilray on Jan. 15, 2019. My hunch is that we'll see a major sell-off by insiders then if the stock is still up a lot. There could even be downward pressure on the stock before then if other investors sell in large quantities before the lock-up period ends.

Will Tilray be a winner over the long run? I think it could be. The stock is way overvalued, in my opinion, even with today's decline. But its business prospects look very good as global cannabis markets expand. It might take a while for Tilray's share price to more appropriately reflect those solid prospects, though. Traders might jump in and out of Tilray, but investors are probably better off watching this volatile marijuana stock from the sidelines for now.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.