Why High-Flying Tilray Is Crashing Again Today

What happened

Turn out the lights, the party's over. That might seem to be the sentiment as Tilray, Inc. (NASDAQ: TLRY) crashed for the second consecutive day. Shares of Tilray were down 27.1% as of 11:06 a.m. EDT Friday. As was the case on Thursday, today's nosedive didn't stem from any announcements made by the Canadian marijuana grower. Instead, it looks like a short squeeze that propelled Tilray stock to dizzying heights has now abruptly ended.

So what

Tilray has served as a textbook example of a short squeeze over the last few weeks. The company has a low stock float with only around 17.8 million shares available for trading. It has a high level of short interest. And Tilray has benefited from several positive developments recently, including the company becoming the first marijuana grower to win approvals for supplying both cannabis flower and cannabis oils to the important German medical cannabis market.

Each positive news story for Tilray caused the stock to rise. These moves, in turn, caused some short-sellers to panic and begin to cover their positions. The more this happened, the more Tilray's share price increased. Of course, the more the marijuana stock rose, the more short-sellers bailed out.

Nothing lasts forever, though, and short squeezes are no exception. When there aren't any more short-sellers to bail out and thereby drive the stock higher, the short squeeze ends. That end often leads to the stock sinking nearly as quickly as it soared. All signs point to this scenario now playing out for Tilray.

These gyrations, however, have little to do with the underlying business prospects for Tilray. Despite the big drop over the last two days, the potential for Tilray to succeed in the global cannabis market hasn't materially changed. Of course, you could also argue that the company's prospects didn't change all that much during the time its stock was skyrocketing.

Now what

At some point in the not-too-distant future, Tilray's share price will stabilize. Just as a short squeeze doesn't last forever, the aftermath only lasts for a finite period as well.

When the dust settles, investors can take a deep breath and rationally evaluate Tilray's potential for returns. It's likely that the stock will still be valued at a huge premium, just as most other Canadian marijuana stocks are. However, Tilray also should have significant growth opportunities with Canada's recreational marijuana market opening in a few weeks and global medical cannabis markets expanding.

It's been a crazy and wild ride for Tilray over the last several weeks. The current party might be over, but I suspect it's way too soon to turn out the lights for Tilray.

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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.