Have you ever wondered why there is a World Series of Poker but not a World Series of Roulette? If you have, you can already guess the answer; it’s no fun watching people play against the house. It is interesting, however, to watch the top players in the world play against each other.
The world of investing is often compared to casinos. So, to take this metaphor a step further, the behemoth traditional blue-chip stocks are like the roulette table.
Besides the incredibly rare mistake that sometimes happens even to the largest of companies, you know what you are going to get. They are the house. If you are investing in blue chips, you are playing by house rules.
Alternatively, if you are buying small-cap companies or stocks trading in a volatile industry, you are playing poker. You see, the majority of investors in these kinds of plays are speculators… people looking to make a quick buck. They aren’t usually the same kind of institutional money that makes up the largest portion of blue-chip shareholders.
This can play into your advantage, if you know what to look out for. Just like in real-life poker, there are tells to keep aware of.
One area recently hit by poker players getting caught in a bluff is cannabis… specifically a company called Tilray Inc. (NASDAQ:TLRY).
Tilray is a Canadian medical marijuana grower and research firm. It recently was given the go ahead to start selling its own-grown marijuana to U.S. research groups. All sounds good right?
Here’s what happened:
As you can see, over the past month, shares of Tilray climbed more than 200%… that is, right up until last Wednesday.
So, what happened? Did the agreement fall apart? Did the company release some bad earnings?
Nope. In fact, the exact opposite happened. The company’s press releases from this month tell the real truth behind what’s going on at the company.
• September 6: “Tilray Selected by Prince Edward Island Cannabis Management Corporation to Supply Adult-Use Cannabis”
• September 11: “Tilray Exports 2:100 CBD Oil to the United Kingdom”
• September 13: “Tilray Exports Bulk Supply of Medical Cannabis Flower to Germany”
• September 18: “Tilray Receives Approval from U.S. Government to Import a Medical Cannabis Study Drug for a Clinical Trial at the University of California San Diego Center for Medicinal Cannabis Research”
It’s clear that the company is doing just fine. In fact, I’d argue that expanding into Germany, the UK and California are three huge positives for the cannabis grower. What’s more, as a Canadian company, it will soon take advantage of the upcoming legalization of marijuana in that country within the next month.
The real reason the stock took off and then collapsed stems from the poker analogy. You see, speculators saw the company was getting big headlines. Some, decided to buy shares to take advantage. Others, however, were hoping the company was holding a losing hand… even if theirs wasn’t very good.
There are two basic types of stock investing. When you buy shares hoping it will go up, you are “long” the stock. When you bet that a stock will go down, you are “short” that play.
While many were going long based on the positive news cycle at Tilray, many more were setting up short positions. Basically, this means they had to borrow shares from their broker, sell them at current market value and wait to buy shares later to pay back their broker.
We know, it can get complicated. The important part of this is paying back your broker.
Since shares of Tilray kept going up, those short sellers started to get squeezed. Meaning their broker wasn’t going to wait forever for these gamblers to pay them back. They forced them to close out their short position, which pushed them into buying shares to pay back.
This meant that alongside regular “long” investors buying shares, even those trying to “short” Tilray had to buy shares as well. That sent shares even higher.
From mid-August until the end of August, short interest in the stock had already doubled to about 20% of all shares outstanding. That’s huge. But by the middle of this month, that doubled again to 40%. Meaning, nearly half of all shares of TLRY were getting squeezed.
We are seeing what happens when a squeeze is on. Shares skyrocket during the squeeze. After the majority of those previous short a stock are out of their play, shares come crashing back to where they should have been trading all along.
Cannabis stocks are especially susceptible to this because of their volatility. So, be weary if you see a stock start to hockey stick like TLRY did. It could be in for a quick correction. However, if you catch a squeeze early enough, you can trade in and out of it before the top and bank a quick buck.
Like we said, cannabis stocks are susceptible to this kind of trading. We’ll keep our eyes peeled for opportunities just like this one.
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