The twenty most shorted cannabis stocks were down over -3.00% on Thursday ahead of Canopy Growthâ€™s (CGC US, WEED CN), Green Organic Dutchman (TGODF US, TGOD CN) and Cronos Groupâ€™s (CRON US, CRON CN) earnings next week.
Cannabis shorts have recouped their -$1.78 billion in first quarter mark-to-market losses and were up +$509 million in mark-to-market profits by the end of the third quarter. October was another profitable month, up +$265 million, and November is starting off strong for cannabis short sellers up +$94 million Thursday and up +$190 million for the month.
We follow 160 securities in the Cannabis sector with a total market cap of $71 billion and short interest of $4.1 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 interest in the cannabis sector is up $945 million, +39%, 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 over 82% of the total shorting executed in the sector with a Short Interest % Float of 12.65%.
The top five most shorted stocks in the sector are also the most shorted stocks in 2019. Short selling in Canopy Growth (CGC US, WED CN), GW Pharma (GWPH US), Aurora Cannabis (ACB US, ACB CN), Cronos Group (CRON US, CRON CN) and Tilray Inc (TLRY US) increased by $1.3 billion in 2019. Over the last month, the most shorted stock in the sector was Aphria Inc (APHA US, APHA CN) with shares shorted increasing by 14%, or $23.5 million. Aurora Cannabis, the second largest short in the sector, had the most short covering over the last month with a decline of $6.4 million. Overall, there was not much short covering in the sector, with the ratio of shares shorted to short covering in the top twenty most shorted cannabis stocks at 10-1.
Shorting stocks in the Cannabis sector is an expensive proposition. The average stock borrow fee for the cannabis sector is 21.60% fee and 24.56% for the top twenty most shorted stocks in the sector. There are two stocks, Tilray Inc (TLRY US) and Aurora Cannabis (ACB US, ACB CN) trading with over a 50% fee. the cost to short the top twenty most shorted names is almost 4.0% higher, at 30.32% fee. In aggregate, total daily short financing costs for the sector is $2.45 million per day or $883 million per year at these rates. For the top 20 most shorted names in the sector cost short sellers $2.28 million per day with Aurora Cannabis making up 41% of the financing cost ($947k.)Â 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.
Short sellers continue to be profitable in the cannabis sector, so the chance of a sector wide short squeeze is minimal. Additionally, because of the concentrated shorts bets in a relatively few stocks there are only six stocks where a short squeeze would have a noticeable effect on the stockâ€™s share price. A short squeeze and the resulting â€śbuy-to-coversâ€ť in cannabis stocks with less than $100 million of short interest would barely move the stock price needle.
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.
If sector wide price weakness continues, we should see a continued slow and steady increase of short selling in the cannabis sector. If stock borrow rates continue to climb and availability continues to tighten for the most shorted stocks in the sector we may see a short selling reallocation to some of the â€ścheaper to shortâ€ť stocks in the sector. Over the past month weâ€™ve seen increased short activity in the â€śsecond tierâ€ť of cannabis shorts such as Hexo Corp (HEXO US, HEXO CN), Green Organic Dutchman (TGODF US, TGOD CN), Charlottes Web (CWBHF US, CWEB CN) and Canntrust Holdings (CTST US, TRST CN).
Want deeper insight into the above analysis?
Contact:Â [email protected]
Managing Director Predictive Analytics, S3 Partners, LLC
For more information on S3â€™s reporting, data and analytics solutions, email us at [email protected]. Start your free trial of the BLACK App â€“ the only source of real-time short interest on the Bloomberg Terminal or Thomson Reuters Eikon.
For short side data and access to our research reports go to https://shortsight.com/ .
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (â€śS3 Partnersâ€ť) to be reliable and accurate.Â Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use.Â Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decisions.