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Here's Why Tilray Inc. Tanked Today

Keith Speights, The Motley Fool

What happened

Shares of Tilray Inc. (NASDAQ: TLRY) were down 11.3% as of 3:30 p.m. EDT on Friday. Several major Canadian marijuana stocks, including Tilray, opened lower this morning due to a story published by Politico that stated employees in the cannabis industry and marijuana stock investors who aren't U.S. citizens could be barred from entering the U.S.

But while Canopy Growth (NYSE: CGC) and Cronos Group (NASDAQ: CRON) -- both of which are also listed on U.S. stock exchanges -- bounced back, Tilray's share price still fell. The most likely reason is that Tilray stock has skyrocketed more than any other marijuana stock over the last few weeks, with the latest news giving some investors a reason to take profits.

Stock chart going down

Image source: Getty Images.

So what

Politico's story certainly seemed at first to be scary for Tilray and other Canadian marijuana stocks. If investors thought they might not be able to travel to the U.S., they could be tempted to shift their money to other alternatives and shun marijuana stocks.

It's true that current U.S. immigration policy does allow officials to block anyone involved in the cannabis industry or profiting from it from entering the U.S. However, I think that fears of major problems related to current regulations are overblown.

Investors seemed to agree with that view, considering that shares of both Canopy Growth and Cronos Group were in positive territory late Friday afternoon. Both companies would be hurt just as much as Tilray by any widespread immigration ban related to the cannabis industry.

But Tilray's decline isn't surprising. Prior to today's drop, the stock had more than quadrupled in price in just one month. Many investors no doubt felt that this huge move might have been too much too fast.  

Now what

Tilray is likely to continue to experience big price swings -- in both directions. There will certainly be a lot of excitement about marijuana stocks as the Canadian recreational cannabis market opens next month. Major alcoholic beverage companies and tobacco companies could be looking for cannabis partners, with Tilray probably among the top candidates.

On the other hand, Tilray's valuation is ridiculously high. Any bad news will probably take a great deal of wind out of its sails. I think that investors can be bullish about the long-term prospects for the global cannabis industry but still acknowledge when stock valuations have gotten ahead of those prospects. That's what we're seeing with Tilray, in my view.

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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.