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Why Tilray Surged Today

Keith Speights, The Motley Fool

What happened

Shares of Tilray (NASDAQ: TLRY) surged 13.5% as of 3:27 p.m. EST on Tuesday. The marijuana stock's big move came after Cowen analyst Vivien Azer wrote in a note to clients that she expected Tilray and Canopy Growth (NYSE: CGC) to outperform in 2019.

Azer anticipates that a couple of factors will boost growth in the North American cannabis industry. She expects stronger growth in the Canadian market, as growers ramp up their production capacity and the recreational marijuana market in the country expands to include cannabis edibles and concentrates. Azer also upped her outlook for U.S. marijuana sales by 2030 from $75 billion to $80 billion.

Shadow of Canadian maple leaf on top of a pile of marijuana leaves

Image source: Getty Images.

So what

A more positive outlook from a leading analyst in the cannabis industry is certainly good news for Tilray. But was there anything really new in Cowen's update? Not really.

Everyone already knew that the Canadian recreational market would pick up momentum in 2019. The worst bottleneck of the market launch in 2018 was limited supply. Tilray and its peers should increase capacity significantly this year, and that translates to higher sales. It's also no surprise that the top marijuana producers should benefit when Canada finalizes regulations on cannabis edibles and concentrates, as expected later in 2019.

What's interesting, though, is to compare the stock movements of Tilray and Canopy Growth after Azer's note to clients became public. Canopy's share price moved higher, but only by a little. The reason that its stock didn't jump as much as Tilray's helps us understand why the market reaction for Tilray isn't anything to get overly excited about.

Canopy Growth arguably has more to gain from the factors underlying Azer's increased optimism than Tilray does. It has a larger production capacity and a greater market share in Canada. So why didn't Canopy rack up gains as Tilray did? Probably because of the differences between the two stocks' floats.

Tilray's stock float is very low: roughly 10 million shares. Canopy's float is nearly five times higher. A low stock float results in greater volatility -- both positive and negative.

Now what

Investors shouldn't make too much out of Tilray's nice move today; there's a more important story just around the corner for the company. On Jan. 15, Tilray's initial public offering (IPO) lockup period expires. Insiders will then be allowed to sell their shares. If the selling volume is heavy, it will likely create significant downward pressure on Tilray's stock price.

However, the factors behind Vivien Azer's increased bullishness give shareholders reason to share her optimism about Tilray over the long run. As the global marijuana market grows, Tilray will probably claim its fair share of the market. In the meantime, though, expect continued volatility for this high-flying marijuana stock.

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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.