Why Tilray, Inc. Vaulted Higher Again Today

What happened

Shares of Tilray, Inc. (NASDAQ: TLRY) were 23.1% higher as of 11:15 a.m. EDT on Tuesday. The Canadian marijuana grower announced earlier in the day that it had received approval from the U.S. government to provide a cannabinoid drug to the University of California San Diego Center for Medicinal Cannabis Research to use in a clinical trial.

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The University of California San Diego plans to evaluate a cannabinoid capsule containing two ingredients from marijuana -- cannabidiol (CBD) and tetrahydrocannabinol (THC) -- in a clinical study targeting the treatment of essential tremor, a nervous disorder that causes involuntary rhythmic shaking. Tilray and the International Essential Tremor Foundation are funding the study, which is expected to begin in early 2019.

So what

This isn't a big deal for Tilray from a financial standpoint. Supplying medical cannabis in limited quantities for one clinical trial that the company itself is helping support financially won't add anything to Tilray's bottom line. However, the news is important symbolically.

For one thing, the U.S. Drug Enforcement Administration (DEA) is quite picky about how cannabis is used in the country for medical research. Winning the DEA's approval is an achievement that Tilray's rivals can't claim.

The clinical study also points to the potential for medical cannabis in treating more conditions. If the study is successful, it could open additional opportunities for Tilray in developing cannabinoid drugs.

Tilray's green light from the DEA also quietly underscored the hope that the U.S. could change federal marijuana laws in the way that allowed Canadian marijuana growers to expand into the U.S. market. Legislative efforts are currently underway to revise U.S. marijuana laws, with President Trump expressing support for these efforts earlier this year.

This marked the second consecutive day of double-digit percentage gains for Tilray. Yesterday, the stock soared on reports that Coca-Cola was in talks with Aurora Cannabis about a potential deal. The report spurred investors' anticipation that Tilray could be next to land a partnership with a major partner outside the cannabis industry.

Now what

Tilray appears to be in a strange zone where even a relatively minor positive story serves as a huge catalyst for the stock. However, that could also set up the stock to fall hard on any negative news.

For investors rooting for Tilray's success, there could be reasons to cheer in the near future. Tilray is likely among the top candidates for major beverage companies, and possibly tobacco companies, looking for a cannabis partner. The excitement over the opening of the recreational marijuana market in Canada could cause Tilray's shares to rise even more.

On the other hand, Tilray's valuation is now beyond defending even using the most optimistic near-term growth prospects. Tilray stock just might be a bubble waiting to pop.

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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.