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People line up to purchase legal cannabis in Calgary on Oct. 17, 2018. This week’s rally by Tilray Brands Inc. suggests that interest in the marijuana sector is alive.Jeff McIntosh/The Associated Press

Pot stocks were fading into oblivion earlier this year when Canopy Growth Corp. WEED-T and Aurora Cannabis Inc. ACB-T, two former stars, slid into penny-stock status. But this week’s rally by Tilray Brands Inc. TLRY-T suggests that interest in the marijuana sector is alive.

Tilray’s share price gained 36 per cent in Toronto over three days this week, after the producer delivered upbeat quarterly financial results.

The bullish hope is that the company has emerged as Canada’s leading marijuana producer, with promising revenue growth and improving free cash flow, at a time when the outlook for the sector is hardly primed on exponential growth.

Indeed, the good news is that intrepid investors can make a persuasive case that the marijuana sector has made the journey from bubbly heights in 2018, when euphoria greeted legalization in Canada and there were hopes for speedy legalization in the United States, to capitulation lows in 2023 amid persistent losses and disappointing growth.

Tilray’s share price offers the clearest illustration of this bizarre round trip: It surged to an intraday high of US$300 on the Nasdaq exchange in September, 2018, up from about US$23 over the prior two months; it touched a low of US$1.50 last month.

Its peers have taken investors on similar wild rides.

Canopy, once the largest producer in Canada, was granted membership in the prestigious S&P/TSX 60 large-cap index in 2019, when the company enjoyed a market value of more than $25-billion. It was removed from the index last year, after a severe slump in the value of the company.

In June, the stock was removed from the broader S&P/TSX Composite Index, weighing further on its visibility and excluding it from exchange-traded funds that track the index.

For investors who like unpopular stocks, these setbacks can be good news though: They suggest that hype and optimism have been wrung out of share prices as investors capitulate, leaving little downside risk and a lot of upside potential should a sustained rebound kick in.

Is Tilray at this turning point?

The company, which produces beer in addition to medicinal and adult-use marijuana, reported some encouraging figures this week for its fiscal fourth quarter, which ended May 31.

Profit margins expanded to 37 per cent from 33 per cent in the same period last year; cannabis sales increased 21 per cent; and though it reported a net loss of US$1.4-billion in fiscal 2023, it burned through just US$8.6-million in cash for the year, compared with US$199-million in the previous year.

“Overall, the quarter came in well ahead of consensus expectations as the company saw lofty sequential increases across all its operating segments,” Matt Bottomley, an analyst at Canaccord Genuity, said in a note that highlighted quarter-over-quarter sales gains.

However, Tilray must overcome a few obstacles on the way to a sustained comeback.

It has an unfortunate connection with meme stocks – companies that gained a lot of attention in online forums in 2021, with investment cases that had more to do with mania than fundamentals, leading to extreme volatility.

And meme stocks are stirring. The Roundhill MEME ETF, which includes stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. (Tilray was ejected from the fund during a rebalancing in March), is up almost 60 per cent so far this year.

These are encouraging gains, for sure, but also a potential source of concern for anyone who is wary of momentum-driven trading.

Another obstacle: Tilray’s valuation is lofty compared with those of peers.

Frederico Gomes, an analyst at ATB Capital Markets, values the stock by comparing the company’s enterprise value – the market value of the stock plus debt, minus cash – to estimated earnings before interest, taxes, depreciation and amortization (or EBITDA). The valuation ratio is 20.8 using this approach, compared with 10.7 for Canadian peers.

“We think the valuation prices in much of our growth expectations,” Mr. Gomes said in a note. He reiterated his lukewarm “sector perform” recommendation on the stock, which is the equivalent of “hold.”

A third obstacle: Despite Tilray’s promising rebound this week, marijuana stocks remain deep in the dumps and carry the stigma of a burst bubble. From its intraday peak, Tilray’s share price is down 99.2 per cent.

For some investors, that might look like a tempting bargain, especially if interest in the sector returns as share prices gain ground. Perhaps this time, investors will tune out the hype and pay more attention to stuff that matters, like valuations.

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