Tilray passes Canopy Growth to become world's most valuable pot company

There's a new name atop the rankings of pot companies, as Nanaimo, B.C.-based Tilray Inc. has passed Smith Falls, Ont.-based Canopy Growth to become the most valuable cannabis company in the world.

Tilray went public on the Nasdaq in July, and has since seen its shares rise more than eightfold from $17 US on its IPO day to more than $136 on Tuesday.

That values the company at just under $14 billion US, enough to push Canopy (valued at just over $14 billion Canadian) out of the top spot it has owned for almost its entire existence.

TSX-listed Canopy is still the biggest marijuana company in the world in terms of production and sales, but the hype around Tilray has driven up its market capitalization, in large part because it is one of the few producers whose shares are listed in the United States — making it easier for U.S. investors to buy.

Tilray got another boost on Tuesday after the company announced that the Drug Enforcement Administration had granted the company permission to import cannabis into the U.S. for medical research. The shares jumped another 12 per cent when the Nasdaq opened on Tuesday, but their collective value had passed Canopy even before that.

'Many buyers … few sellers'

While the DEA approval is a big strategic step for the company, its rising share price is also partly the result of a quirk of supply and demand on the stock market, says Chris Damas, editor of the BCMI Cannabis Report.

Tilray has about 76 million shares in total, but only just over 10 million of them are available for trading at any given time. That's far fewer than big pot companies on the TSX tend to have, including Canopy, which has a float 20 times that size — 214 million shares.

That paucity of shares is helping push up Tilray's price, as brokerages process the backlog of orders for more shares than are available.

"At the end of the day, stocks trade on supply and demand," Damas says. And Tilray "has many many buyers [and] few sellers."

Tilray "should arrange to sell stock and take some air out of the Tilray bubble," Damas says, but so far that's not happening. "Hence Tilray's stock keeps rising — a one-way street, for at least the short term."

While Tilray has been the best-performing marijuana company by a long shot in recent weeks, it's also become the favourite target of short-sellers, investors who make money by betting on the decline of any given stock.

Short sellers borrow shares from other investors, and sell them because they are confident they will be able to buy back the same share at a lower price later to replace the one they borrowed. They make money on the gap between the price they borrowed at to sell, and the price where they buy back in.

If the stock drops, they pocket a profit. If it rises, they lose.

Bloomberg data shows that more than a third of Tilray's shares are currently held by short-sellers, which is broadly a sign that a good chunk of investors expect the stock to move lower. 

But in the short term at least, counterintuitively, at least part of the run-up in Tilray is being caused by what's known as a short squeeze, which is when short sellers are forced to buy into a rising stock price to cut their losses. And all that buying pushes the stock up even higher, at least in the short term.

But "the history books show a short squeeze can bring down a whole sector," Damas said.