Cannabis stocks have raised the legitimacy of the entire industry as publicly traded companies continue the development of the sector. Investors have also shown an eagerness to get exposure into the growth sector.

This investor sentiment, accompanied by a myriad of factors, is described by 420 Investor cannabis analyst Alan Brochstein as a perfect storm. This has led to one of the most incredible rallies in the public markets seen from Canadian cannabis licensed producer (LP) Tilray (NASDAQ:TLRY).

The LP made its public debut on the Nasdaq exchange in July through an initial public offering (IPO) worth US$153 million. This was the first time a Canadian cannabis company had gone directly to a premier US listing instead of uplisting from a Canadian one.

The company didn’t appear out of nowhere; Tilray had steadily increased its production and kept up with the works from its public competitors, such as Canopy Growth (NYSE:CGC,TSX:WEED) and Aphria (TSX:APH).

Tilray also launched a limited float of Class 2 common stock for the market to purchase and trade. Tilray’s parent company, Privateer Holdings, has a dominating controlling stake in the company’s Class 1 voting shares.

According to Nasdaq’s IPO data, the lockup expiration on new shares is January 15, 2019. This means no new shares will become available for investors until Privateer’s shares lock-up ends.

During an interview, Brochstein estimated Tilray was among the top five or seven LPs in Canada, with potential investors unaware of the company’s path.

Stock begins unseen rally

Following the Tilray IPO, which debuted at a price of US$17 and closed its first day at a price of US$22.39 per share, the new stock continued a steady increase until a rapid rise appeared.

This hike continued to levels never seen before for a Canadian cannabis producer in the public markets. Things escalated when shares of the producer rose 81.6 percent during the last two weeks of August. On August 31 the share price for Tilray was US$65.20

In September, the stock took off until the peak was found with Tilray establishing a new 52-week high of US$300 for its share price on September 19.

Tilray also found itself in the middle of rumors as a report showed alcohol producer Diageo (NYSE:DEO) was eyeing an entry point into the cannabis market.

Doug Waterson, CFO and portfolio manager with Faircourt Asset Management and manager of the Ninepoint UIT Alternative Health Fund, told the Investing News Network (INN) a “highly significant portion” of the gains for Tilray was its position with the Diageo entry.

“[Tilray is] a quality name in the space and it would make a good partner for someone looking to enter [such as a] beverage company,” Waterson said.

Criticism of Tilray’s stock impact on overall market

Tilray’s stock increase led to criticism of the cannabis industry and how investors were getting ahead of themselves since these companies haven’t reported substantial revenues to back up the valuations given.

The Canadian adult-use cannabis market will come online on October 17, opening a new source of revenue for companies that have signed supply agreements with the provinces. Until then, these producers have secured revenue through legal medical sales to cannabis patients.

A big critic of the performance of these pot stocks is Nic Easley, CEO of 3C Consulting and a managing partner with Multiverse Capital. At the Vancouver edition of the International Cannabis Business Conference (ICBC), Easley told investors cannabis was a bubble three times worse than the infamous dotcom one.

Easley went as far as to say he thinks the market activity around stocks like Tilray will have a negative impact in the industry for years to come.

“Tilray’s stock is completely out of control… It’s going to hurt investor confidence in public markets and private markets,” Easley told INN.

The executive said investors could be in danger for not doing proper due diligence and criticised the disclosure seen from cannabis companies in the public markets so far.

In his weekly email alert to investors, Brochstein countered the argument of Tilray’s stock being a negative to the space. In his column Brochstein wrote:

Some worry that the deflation of the Tilray bubble may have negative consequences for the broader sector, but we disagree. In fact, we see the Tilray parabolic spike and the success of Cronos Group and Canopy Growth since they listed on major U.S. exchanges as a big positive.

Limited shares and investor eagerness motives behind Tilray’s rush

Brochstein explained a large portion of investors have little to no interest in OTC stocks or Canadian ones on the Toronto Stock Exchange (TSX), TSX Venture (TSXV) or Canadian Securities Exchange (CSE).

“We have seen a lot of interest (price spikes, big volume) in several other non-OTC names with ties to the cannabis or hemp industries as well,” Brochestein wrote.

Brochstein said the demand for exposure into this space outweighs the supply for the time being. Aurora Cannabis (TSX:ACB) has revealed it will list on a premier US exchange and other producers like Aphria and CannTrust Holdings (TSX:TRST) have made similar expectations known to investors.

“This listing provides access to a broader investor audience who gain the opportunity to participate in our continued success,” Aurora Cannabis CEO Terry Booth said as part of the producer’s Q4 2018 report.

Another crucial factor seen as the catalyst for the growth Tilray’s shares took was the actual limited amount of stock available for purchase.

Once the stock started rising, and as the company’s market cap reached US$13.5 billion, financial experts noticed only approximately just over 17 million shares were available for trading.

Then, finally on September 20, Tilray slowed its unrelenting pace closing the trading session with a loss of 17.62 percent. Since then, the stock has declined an additional 43.58 percent and closed on Tuesday’s (September 25) session at a price of US$107.88.

On Tuesday the company saw a positive return with an 8.42 percent increase in value with a high of US$119.40.

Investor takeaway

Investors have patiently awaited validation on the cannabis market and Tilray’s stock path has provided a unique way to raise the name and appreciation of these pot stocks.

As more Canadian producers look to list in premier US exchanges, a more varied type of investor awaits the cannabis industry.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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