Even with a gain of +$75 million on Tuesday, short sellers in the twenty most shorted cannabis stocks are down -$132 million, -4.0%, in net-of financing mark-to-market losses in December, bringing year-to-date P\L down to +$993 million. The biggest short-side losers for the month are shorts in Canopy Growth (CGC US, WEED CN), GW Pharma (GWPH US), Aphria Inc (APHA US, APHA CN) and Cronos Group (CRON US, CRON CN). The biggest short-side winners are Aurora Cannabis (ACB US, ACB CN); Charlottes Web (CWBHF US, CWEB CN) and Tilray Inc (TLRY US).
We follow 243 securities in the in the U.S. and Canadian Cannabis sector with a total market cap of $84 billion and short interest of $3.9 billion. Most stocks in the sector have both U.S. and Canadian listings and trading is fungible across both securities therefore it is necessary to look at stocks on both sides of the border to get a complete picture of short selling in the cannabis sector. Short exposure in the cannabis sector is up +$843 million, +35%, in 2019. Short selling is fairly concentrated to a handful of names, with only six stocks topping $100 million of short interest. The top 20 shorts make up almost 84% of the total shorting executed in the sector with a total Short Interest of $3.3 billion and a Short Interest % Float of 6.80%.
There was a net decrease of -11.6 million shares of cannabis stocks shorted (short covering) over the last 30 days for the twenty most shorted stocks, decreasing overall dollar short exposure by -$43 million. This is a short-term reversal of the year-long trend of net short selling in the top twenty that has totaled +$1.63 billion for the year. Over the last thirty days we saw short covering in Aphria (APHA US, APHA CN) -$40.3 mm; Canopy Growth (CGC US, WEED CN)Â Â -$30.6 mm; Aurora Cannabis (ACB US, ACB CN) -$21.4 mm and Tilray Inc (TLRY US) -$17.5 mm. We saw increased short selling in Cronos Group (CRON US, CRON CN) +$25.9 mm and GW Pharma (GWPH US) +$20.2 mm.
Shorting stocks in the Cannabis sector is an expensive proposition with stock borrow rates increasing by 5.36% fee over the last 30 days. The average stock borrow fee for the cannabis sector is 26.87% fee and 31.07% for the top twenty most shorted stocks in the sector. There are only two stocks, Hexo Corp (HEXO US, HEXO CN) and Tilray Inc (TLRY US) trading with over a 50% fee.
In aggregate, total daily short financing costs for the entire sector is $2.92 million per day or $1.05 billion per year at these rates. The top 20 most shorted names in the sector cost short sellers $2.83 million per day or 97% of the total stock borrowing cost of the sector. Canopy Growth is by far the most popular short in the sector and it makes up almost half (48%) of the overall stock borrowing costs in the sector. With such a high cost of financing eating into short sellersâ€™ Alpha there is a higher urgency to be correct quickly in their short thesis.
One of the continued issues in the cannabis sector is the high cost of financing and lack of borrowable supply. High stock borrow fees in most of the cannabis stocks are taking a large bite out of mark-to-market profits and discouraging increased short selling in the sector. If any stock rallies significantly the chances of a single stock squeeze are higher than in most other sectors in the market due to these high stock borrow fees.
Even with high stock borrow financing fees, the sector has surprisingly been immune to short squeezes as shorts have been profitable in most of the heavily shorted names. If M&A activities such as consolidation, takeovers or corporate partnerships re-emerge, there may be a significant and prolonged sector wide rally. This may create short squeezes and chase some shorts out of their positions in order to realize their year-to-date mark-to-market profits. A prolonged cannabis sector rally will be bolstered with a flurry of short covering as the high cost of short financing (stock borrows) coupled with mark-to-market losses will result in multi-security short squeezes.
In addition to the possibility of a rally based short squeeze, we see limited stock borrow supply in many cannabis securities as reflected by their high stock borrow rates. Extensive short selling in stocks such as Hexo Corp (HEXO US, HEXO CN), Tilray Inc (TLRY US), Canopy Growth (CGC US, WEED CN) and cbdMD Inc (YCBD US) will not be possible unless more stock borrow supply comes into the market. Therefore, short selling pressure in many of the cannabis sector securities will be minimal at best and long shareholders will be main catalyst for both upward and downward stock price moves.
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Managing Director Predictive Analytics, S3 Partners, LLC
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