We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Zacks Investment Ideas feature highlights: Tilray, Tesla and Microsoft
Read MoreHide Full Article
For Immediate Release
Chicago, IL – September 21, 2018 – Today, Zacks Investment Ideas feature highlights Features: Tilray (TLRY - Free Report) ), Tesla (TSLA - Free Report) ) and Microsoft (MSFT - Free Report) .
Tilray Rallies Again: Anatomy of a Short Squeeze
On Wednesday, we reported on a remarkable rally in the shares of Tilray in which the Canadian cannabis manufacturer rallied more than 30% in a single trading session and had now risen almost 900% since their July IPO.
On Wednesday, that almost unprecedented rally continued with the stock up 50% in intraday trading and now 1,250% above the price they were initially trading in public markets just two months ago.
Earlier in 2018, Tesla CEO Elon Musk predicted that the “Short burn of the century” was imminent in shares of the electric automaker. Due to some fairly extreme price volatility, there have been many opportunities for traders to make and lose vast sums of money on Tesla on both the long and short side of the market - depending on the timing of their trades.
As far as short burns go, however, it looks like there’s a new sheriff in town – Tilray.
The shares spent the first month after the IPO in a trading range about 25% above the offering price and looked like merely a “successful” new company in a hot industry. Impressive, but not totally out of the ordinary.
Then a string of positive news items in August started to move the shares higher and investors eager to jump on the marijuana industry bandwagon began snapping up shares at higher and higher prices. Although the valuation didn’t make much sense by any conventional measure, buyers seemed to be focused on the potentially enormous size of the global cannabis market and Tilray’s chances of grabbing a big chunk of it over the coming few years.
At its core, the correct price for an equity investment is the discounted value of future cash flows, adjusted for risk.
For a stock like a utility – where future cash flows are known with great certainty, the stock price tends to mimic the price of a bond with the same risk. Any price volatility is due more to changes in interest rates than in changes in expectations about revenues or earnings.
For a mature large cap stock that maintains growth potential – like Microsoft, future cash flows are far from certain, but analysts can still make pretty accurate estimates and price volatility in the shares still tends to be relatively low.
For a brand new company with scant history of financial results to examine but with an apparent foothold in a rapidly growing industry, future estimates are anybody’s guess and all sorts of prices can be justified. That’s part of what’s happening at Tilray.
It appears however that it’s a small part of the extreme price movement we’ve seen over the past few days. A much more plausible explanation is a good old fashioned short squeeze. Two specific factors are at play – a scarcity of shares to borrow to sell short and an unprecedented interest cost to maintain a short position are causing shorts to buy to cover their positions with little regard for price.
In large cap stocks with a huge number of shares outstanding and high liquidity, traders can buy or sell shares at will with little friction - and in most cases even earn a small amount of interest on the credit balance that results from a short sale.
In the case of stocks that are very hard to borrow in order to sell short, clearing firms and prime brokers will charge a trader interest to sell the shares, compensating the the brokerage for the difficulty of finding shares to sell. Typically that rate ranges from a few percent to 20-30% for very hard to find issues.
The short rate on Tilray went from 17% in August to over 200% earlier this month and now tops 400%.*
(note: these rates are not constant and vary from firm to firm, though they tend to move in unison across the brokerage community.)
That means that if you sold Tilray short, you’d pay 400% of the balance of the sale in short interest annually to hold the position. If TLRY went completely out of business with no liquidation value and the shares went to zero in three months, you would break even on the trade, having paid all of your profits on short interest. Suddenly the short squeeze starts to make sense. Almost anyone would buy back those shares immediately as the possibility of a profitable short trade is almost zero.
Of course, very well-capitalized and bold traders might be able to hold on (or even initiate new shorts at these high levels) in the hopes that once the weak shorts have covered, the stock will tumble back to its previous levels, but that’s an extremely difficult trade to make – and certainly not for the average retail investor.
Even if you believe that marijuana is the best growth industry right now and that Tilray is the leader of that pack, this recent market activity indicates that most investors have no business being on either side of Tilray right now, long or short. It’s a blind gamble if you’re in it and pure entertainment if you’re not, but one thing it definitely is not is aninvestment.
*There will be a more indepth discussion of short rates and their relation to option prices Thursday morning in Zacks "Know Your Options"
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%. And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Zacks Investment Ideas feature highlights: Tilray, Tesla and Microsoft
For Immediate Release
Chicago, IL – September 21, 2018 – Today, Zacks Investment Ideas feature highlights Features: Tilray (TLRY - Free Report) ), Tesla (TSLA - Free Report) ) and Microsoft (MSFT - Free Report) .
Tilray Rallies Again: Anatomy of a Short Squeeze
On Wednesday, we reported on a remarkable rally in the shares of Tilray in which the Canadian cannabis manufacturer rallied more than 30% in a single trading session and had now risen almost 900% since their July IPO.
On Wednesday, that almost unprecedented rally continued with the stock up 50% in intraday trading and now 1,250% above the price they were initially trading in public markets just two months ago.
Earlier in 2018, Tesla CEO Elon Musk predicted that the “Short burn of the century” was imminent in shares of the electric automaker. Due to some fairly extreme price volatility, there have been many opportunities for traders to make and lose vast sums of money on Tesla on both the long and short side of the market - depending on the timing of their trades.
As far as short burns go, however, it looks like there’s a new sheriff in town – Tilray.
The shares spent the first month after the IPO in a trading range about 25% above the offering price and looked like merely a “successful” new company in a hot industry. Impressive, but not totally out of the ordinary.
Then a string of positive news items in August started to move the shares higher and investors eager to jump on the marijuana industry bandwagon began snapping up shares at higher and higher prices. Although the valuation didn’t make much sense by any conventional measure, buyers seemed to be focused on the potentially enormous size of the global cannabis market and Tilray’s chances of grabbing a big chunk of it over the coming few years.
At its core, the correct price for an equity investment is the discounted value of future cash flows, adjusted for risk.
For a stock like a utility – where future cash flows are known with great certainty, the stock price tends to mimic the price of a bond with the same risk. Any price volatility is due more to changes in interest rates than in changes in expectations about revenues or earnings.
For a mature large cap stock that maintains growth potential – like Microsoft, future cash flows are far from certain, but analysts can still make pretty accurate estimates and price volatility in the shares still tends to be relatively low.
For a brand new company with scant history of financial results to examine but with an apparent foothold in a rapidly growing industry, future estimates are anybody’s guess and all sorts of prices can be justified. That’s part of what’s happening at Tilray.
It appears however that it’s a small part of the extreme price movement we’ve seen over the past few days. A much more plausible explanation is a good old fashioned short squeeze. Two specific factors are at play – a scarcity of shares to borrow to sell short and an unprecedented interest cost to maintain a short position are causing shorts to buy to cover their positions with little regard for price.
In large cap stocks with a huge number of shares outstanding and high liquidity, traders can buy or sell shares at will with little friction - and in most cases even earn a small amount of interest on the credit balance that results from a short sale.
In the case of stocks that are very hard to borrow in order to sell short, clearing firms and prime brokers will charge a trader interest to sell the shares, compensating the the brokerage for the difficulty of finding shares to sell. Typically that rate ranges from a few percent to 20-30% for very hard to find issues.
The short rate on Tilray went from 17% in August to over 200% earlier this month and now tops 400%.*
(note: these rates are not constant and vary from firm to firm, though they tend to move in unison across the brokerage community.)
That means that if you sold Tilray short, you’d pay 400% of the balance of the sale in short interest annually to hold the position. If TLRY went completely out of business with no liquidation value and the shares went to zero in three months, you would break even on the trade, having paid all of your profits on short interest. Suddenly the short squeeze starts to make sense. Almost anyone would buy back those shares immediately as the possibility of a profitable short trade is almost zero.
Of course, very well-capitalized and bold traders might be able to hold on (or even initiate new shorts at these high levels) in the hopes that once the weak shorts have covered, the stock will tumble back to its previous levels, but that’s an extremely difficult trade to make – and certainly not for the average retail investor.
Even if you believe that marijuana is the best growth industry right now and that Tilray is the leader of that pack, this recent market activity indicates that most investors have no business being on either side of Tilray right now, long or short. It’s a blind gamble if you’re in it and pure entertainment if you’re not, but one thing it definitely is not is aninvestment.
*There will be a more indepth discussion of short rates and their relation to option prices Thursday morning in Zacks "Know Your Options"
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%. And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>
Follow us on Twitter: https://twitter.com/ZacksResearch
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com/performance
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.