One month ago I told investors to avoid Tilray Brands (TLRY) . This stock has too many red flags, not the least of which is the attention and affection of retail investors. Retail has been the kiss of death for names such as AMC Entertainment (AMC) and Bed Bath and Beyond (BBBYQ) , which this year have lost 80% and 93% of their value, respectively.
Apparently I'm not alone in my distain for Tilray. On Monday morning, research firm Kerrisdale Capital published a scathing letter on the Canadian cannabis company, titled The Blunt Truth. Kerrisdale accuses Tilray's management of deceptive accounting practices and "ongoing, shameless and massive dilution" of the company's shares.
On Monday, Tilray dropped by 13% on nearly double its average volume as word of the report spread. Kerrisdale's target for the stock is below $1.
On its chart, Tilray has formed a double top pattern (curved black lines). That bearish pattern projects the stock to $1.50. Tilray's MACD (moving average convergence divergence) indicator flashed a sell signal last Friday (arrow).
Source of charts: TradeStation
If the Kerrisdale report is accurate, we need to wonder if Tilray is the only cannabis company playing games with accounting and dilution. The damage from the report wasn't contained to Tilray as the entire cannabis complex traded lower on Monday. (BTW, Real Money Pro's Doug Kass has written extensively about cannabis stocks, including this post from Monday.)
One of the most popular ways to invest in this sector is the Alternative Harvest ETF (MJ) , which fell 4.5% on Monday. That ETF has been on fire, gaining nearly 50% since Aug. 28.
Monday's move caused the Alternative Harvest ETF to pull back after a long stretch in overbought territory (shaded yellow), according to its RSI (relative strength index) indicator.
The Roundhill Cannabis ETF (WEED) has been even hotter, climbing an astonishing 91% since Aug. 29. WEED is still overbought, according to its RSI (shaded yellow), which remains above 70.
Why are cannabis stocks so high right now? On Aug. 30, the U.S. Department of Health announced it favors reclassifying marijuana from a Schedule 1 to a Schedule 3 substance.
Marijuana at present is classified as a Schedule 1 substance, meaning it has no currently accepted medical use and a high potential for abuse. Heroin and LSD are examples of Schedule 1 substances. There's no question that marijuana shouldn't be classified as a Schedule 1 substance.
However, there's plenty of doubt over what the reclassification of marijuana in the U.S. would mean to cannabis stocks, especially to non-U.S. companies such as Tilray.
Due to the recent rally in cannabis names, the effects of reclassification are at least partially priced in. Investors should avoid cannabis stocks, especially now that their prices are so high.