Cannabis producer Tilray Inc. experienced one of the wildest trading sessions in recent memory Wednesday, with trading halted five times in a roller-coaster end to the session, but the end result — a 38% gain— has become somewhat normal for a stock that is more susceptible than others to wild price swings.
Tilray TLRY, +38.12% stock’s outsize volatility and meteoric gains from its July initial public offering of $17 a share — it closed at $214.06 Wednesday, after trading as high as $300 — is the result of several factors converging: A relatively small number of outstanding shares, significant short interest and not many investors than can loan the stock to short sellers. The result is a stock that can swing wildly based on relatively minor announcements of its own, or even cannabis competitors’ news.
Tilray has only 17.8 million shares available for trading, a very small number — for comparison, fellow cannabis producer Cronos Group Inc. CRON, +9.78%CRON, +8.77% has a float of almost 196 million shares, while Aurora Cannabis Inc. ACBFF, -0.82% ACB, -1.36% has nearly 912 million shares available to trade. With so few shares available, it is easier for a small number of investors interested in acquiring or disposing of a small number of shares to push the price higher or lower.
Meanwhile, there is an enormous amount of trading that helps push demand for the limited amount of Tilray shares. On Wednesday, 31.5 million shares changed hands, according to FactSet, while the average volume for the past five days is 17.8 million shares — the same as the number of shares in public hands.
Tilray’s small float won’t last forever, however. The company’s lockup period will expire 180 days after its July 19 IPO, which will allow insiders like executives and employees, as well as other institutional shareholders and investors, to openly trade the stock they own. Even after the lockup expires, Privateer Holdings — the venture-capital firm that spawned Tilray — will still own the vast majority of stock, with 75 million shares.
Other institutional owners who hold Tilray are not as publicly known as Privateer, though. The company conducted a funding round several months prior to its IPO but has not disclosed the investors.
Part of the reason for the volatile stock price could also be a wide spread between the bid and offer. On Wednesday the difference between what investors were selling the stock for and the bid was as much as $2; the bid-offer spread on Apple Inc. AAPL, +0.06% for example, can usually be measured in cents.
As a result of these factors, Tilray’s announcements and other developments in the cannabis industry can have an outsize impact on the stock price — after Constellation Brands Inc.’s STZ, +0.77% $4 billion investment in fellow cannabis producer Canopy Growth Corp. CGC, -4.89% WEED, -5.75% , Tilray’s shares rose 16% on the day.
Constellation’s massive bet on the cannabis industry came amid a flurry of activity as Canada gears up for the legalization of recreational marijuana on Oct. 17. Other beverage giants such as Diageo PLC DEO, -0.70% and Coca-Cola Co.KO, +0.07% have been reportedly eyeing a deal with cannabis firms, which has fueled gains. And Canadian provinces, which are charged with the nuts and bolts of selling marijuana, have been releasing the quantities and suppliers of cannabis they intend to buy leading up to October.
Stocks have even surged after such data releases from relatively small provinces such as Nova Scotia — population 950,000 — though they do not typically contain information about quantities from specific suppliers.
Despite the small float and high short interest, Tilray stock is not in a short squeeze, said S3 Partners managing director of predictive analytics Ihor Dusaniwsky. A short squeeze is a market phenomenon when a heavily shorted stock rises quickly, causing shorts to exit their positions, usually at a loss. Dusaniwsky said Wednesday on Twitter that there were 3.5 million shares shorted as of the end of August and that number hasn’t changed significantly since.
$TLRY short interest $536 million, 3.46 mm shares shorted, 33.56% of float. #Tilray stock up 50%, shorts down $272 million in mark-to-market losses, down -$435mm YTD. Virtually no short selling today as locates are scarce. New borrows @ 600%-800% fee, existing shorts @ 225% fee pic.twitter.com/6hY84ATA7N
— Ihor Dusaniwsky (@ihors3) September 19, 2018
Dusaniwsky said that because of the lockup and the high short interest, there is literally no more stock that investors can borrow to short the name. What appears to be driving the price, Dusaniwsky told MarketWatch on Tuesday, is buyers bidding up Tilray shares.
Tilray shares finished Wednesday’s wacky session up 38% to $214.06 but declined in after-hours trading. The S&P 500 index SPX, +0.13% closed up 0.1% Wednesday.