We track short interest for 150 securities with $111 billion of market cap in our Cannabis Portfolio to get an overview into short selling activity in the market. These U.S. and Canadian stocks and ETFs have over $5.1 billion of total short interest, an average short interest % of float of 8.25% and 16.75% average stock loan fee. Weâ€™ve seen increased short selling activity in this sector throughout all of 2019 with 99.5 million of net shares shorted worth $1.40 billion. In July, short selling was a bit muted, with 7.2 million shares of new short selling worth $169.7 million.
Canopy Growth had the largest $ increase of shares shorted in July, with an additional 2.1 million shares shorted worth $69.6 million, followed by GW Pharma with an increase of $59.5 million and Aurora Cannabis with an increase of $47.6. On the short covering side, Aphria Inc had the largest decrease in $ shares shorted with stock covering worth -$23.6 million, followed by Tilray Inc -$18.0 million worth of buy to covers.
In general, Cannabis stock short sellers have not had a profitable year with the 20 most shorted stocks down -$690 million in year-to-date mark-to-market losses. The big mid-year losers were short sellers in Aurora Cannabis (-$274 million), Canopy Growth (-$227 million), GW Pharma (-$167 million) and Cronos Group (-$85 million). On the positive side, short sellers in Tilray Inc (+$64 million), Canntrust Holdings (+$53 million) and Hexo Corp (+$21 million) had had a profitable first half of 2019.
July saw overall weakness in the Cannabis sector and short sellers were able to recoup over half of their previous year-to-date losses. The top 20 shorts were up $735 million in mark-to-market profits in July, reducing year-to-date losses to -$690 million. The big winners in July were Canopy Growth (+$301 million), Aurora Cannabis (+$173 million) and Cronos Group (+$82 million).
Cannabis stocks have relatively high stock borrow financing costs relative to the overall market. It is 21 times more expensive to borrow stocks in the Cannabis sector than in the overall U.S.\Canadian market. The average cost to borrow a stock in the U.S.\Canadian market is 0.80% fee versus 16.75% fee in the Cannabis sector. Cannabis sector short sellers are paying $2.4 million in daily stock borrow costs, which is a meaningful offset to Alpha gains. Some of the most expensive stock borrows in the 20 most shorted stocks in the sector are Tilray (41.32% fee); Aphria (41.12% fee), Aurora Cannabis (26.12% fee) and Canopy Growth (25.87% fee).
Short sellers continue to increase their exposure in the Cannabis sector. Short interest in the top 20 most shorted stocks in the sector is up $1.89 billion, +78.32%, for the year. Even though shorts have not had a stellar year so far in 2019, the rally we saw in cannabis stocks from late 2017 through 2018 has short sellers jonesing for a price reversal in the sector. Neither the excessive price volatility relative to the overall market nor high financing costs is deterring shorts from building and holding onto their positions and single name short squeezes do not look to be in any of these top 20 stocksâ€™ near-term future. Julyâ€™s sector price weakness has minimized year-to-date losses and emboldened Cannabis short sellers to continue selling stock.
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Managing Director Predictive Analytics, S3 Partners, LLC
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