You know the pattern. Big Cannabis soars for weeks on end, then spends a similar amount of time correcting course. This is the correction.
Aurora Cannabis Inc. (NYSE:ACB), Canopy Growth Corp (NYSE:CGC) and other cultivators are down another 4% to 5% this week. Rival Tilray Inc. (NASDAQ:TLRY) is down 12%, pulling the entire group down.
Tilray’s problem amounts to Wall Street’s deteriorating patience with the business model. There is simply too much supply of raw plant product coming to the market and consumption isn’t growing fast enough to keep up.
To cope with those dynamics, Tilray management has committed to acquiring rivals even if it means printing a lot of stock to fund the transactions. After a certain point, existing shareholders get tired of endless dilution.
The number of Tilray shares on the market has quadrupled in the past five years. And those who hoped their company was finally in a good competitive position after combining with the old Aphria evidently need to accept that their stock will represent a smaller and smaller slice of the overall enterprise.
Some have remained patient, keeping the big picture and the long view for cannabis in sight. After all, dispensary sales remain robust. That side of the industry is growing as fast as ever.
The cultivators that survive will make a lot of money. But the consolidation process will be brutal, and I think that’s what’s going on with Tilray right now.
It’s okay to lose your nerve. Just admit it and move on. The rest of us will stay right where we are, with our eyes on the long-term return and our portfolios in a healthily diversified state.
