Tilray Brands Stock Has Rallied 110% in Just 6 Months. Can Its Rally Keep Going?

Tilray Brands (NASDAQ: TLRY) is a leading cannabis producer in Canada that has diversified into alcohol in recent years. For the most part, however, it has been a struggling company. It has failed to live up to the hype and expectations that its CEO outlined for it.

In the past six months, however, the stock has more than doubled. It's an impressive performance for a stock that has consistently declined in value year after year. What's behind the stock's recent surge, and can it continue rising higher?

Image source: Getty Images.

Hopes of marijuana reform gave Tilray a big boost in October

This is a cycle I've become accustomed to, having written about cannabis stocks for around eight years now. News of potential marijuana reform or legalization in the U.S. results in a sharp rally in leading cannabis stocks, only for them to eventually fall back down to reality. Aurora Cannabis and Canopy Growth used to be the leaders in the space, but now it's Tilray Brands that effectively serves as a way for investors to bet on the prospects for legalization. When hopes are high, its stock takes off.

That's what happened in late September, when President Donald Trump posted a video on his Truth Social account that talked about the benefits of seniors using cannabidiol. It seemed to be an endorsement for the industry. This was also a time when investors were hopeful that marijuana may also be reclassified to a less dangerous substance (from Schedule I to Schedule III). The excitement led to Tilray's stock hitting a new 52-week high of $2.32 on Oct. 9.

Has the hope faded?

Unfortunately, no progress has been made since late September to indicate further development. In fact, things may be going in the opposite direction, as according to the U.S. Attorney's office, people who use marijuana or have possession of it on federal lands (e.g. national parks) "will now be rigorously prosecuted" -- a reversal of the previous guidance.

Another more concerning development is the passing of a government bill that will ban the vast majority of hemp-derived products. This means that gummies, drinks, and other products that Tilray and other cannabis companies have developed as a way to enter the U.S. market without running afoul of marijuana bans could see a once-promising growth opportunity dry up when it takes effect a year from now.

Tilray, unsurprisingly, has given back a good chunk of its gains in recent weeks, and it's now down more than 50% from its 52-week high. With things seemingly moving in the wrong direction, the danger is that the stock may be on the verge of sliding even further down, potentially wiping out all the gains it has amassed in recent months.

Volatility is par for the course when it comes to Tilray Brands stock

Tilray Brands isn't much of an investable business at this stage. It has become more diversified over the years, but it's still burning through cash, its growth has been slowing down, and its prospects for long-term growth depend heavily on whether the U.S. legalizes marijuana. Its core cannabis market in Canada is highly competitive and margins are low, making it incredibly difficult for it or any other marijuana producer there to turn a profit.

While there are opportunities in international markets for Tilray to explore, they pale in comparison to the U.S., which is why it's the possibility of legalization and reform in the U.S. that usually moves Tilray's stock in big ways. Unles you're prepared for significant risk and volatility, you're likely better off avoiding Tilray's stock entirely.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.