Tilray Inc (TLRY US) reported a larger than expected 2nd quarter loss despite beating analystsâ€™ revenue expectations. An increase in operating expenses due to expansion was the main driver to the increase in expenses. TLRY is down over 12% on the news and virtually all the larger stocks in the Cannabis Sector are trending downward as well.
Cannabis stocks have performed well in 2019, with the Horizons Life Sciences ETF (HMMJ CN) up over 19% and the ETFMG Alternative harvest ETF (MJ US) up over 11%. Short sellers in the sector have not fared that well, down $951 million in year-to-date mark-to-market losses in the top 20 most shorted Cannabis stocks before todayâ€™s trading. Today these short sellers have recouped their August losses, up $269.1 million in daily mark-to-market profits and now up $11.7 million for the month of August, but still down -$681.9 million year-to-date 2019.
We follow 150 securities in the Cannabis sector with a total market cap of $115.5 billion and short interest of $5.5 billion. Short interest in the Cannabis sector is up $2.28 billion, +95%, in 2019. While the Cannabis sector does not have many heavily shorted securities, with a Short Interest % of Float of 10.04% versus 11.51% for the overall domestic equity market, it is an expensive sector to short stocks. The average cost to borrow Cannabis stocks is 17.70% fee versus 0.79% fee for the overall domestic equity market. Short selling is fairly concentrated to a handful of names, with the top 20 shorts making up over 85% of the total shorting executed in the sector.
In August, weâ€™ve seen increased short selling in several names with the biggest movers to the upside being Aphria Inc (APHA US, APHA CN), Cronos Group (CRON US, CRON CN) and Canntrust Holdings (CTST US, TRST CN). There was not much such covering in the sector with only Canopy Growth (CGC US, WEED CN) and Aurora Cannabis (ACB US, ACB CN) the only stocks having any significant decrease in shares shorted. Overall, shares shorted in the sector increased by 59% in 2019. For the year, the largest increase in short selling occurred in GW Pharma (GWPH US), Canopy Growth (CGC US, WEED CN), Cronos Group (CRON US, CRON CN) and Hexo Corp (HEXO US, HEXO CN). Only two stocks in the top twenty most shorted stocks had short covering for the year, Organigram Holdings (OGI US, OGI CN) and Ianthus Capital (ITHUF US, IAN CN).
Shorting stocks in the Cannabis sector is an expensive proposition. While the average stock borrow fee for the sector is 17.70% the cost to short the top twenty most shorted names is over 2% higher, at 19.63% fee. There are several stocks with borrow rates over 30% fee. Flowr Corp (FLWPF US, FLWR CN), Aphria Inc (APHA US, APHA CN), Tilray Inc (TLRY US) and Organigram Holdings (OGI US, OGI CN) are the most expensive borrows in the sector. In aggregate, total daily short financing costs for the top 20 most shorted names in the sector cost short sellers $2.55 million per day. With such a high cost of financing eating into short sellersâ€™ Alpha there is a higher urgency to be correct in their short thesis.
With high financing costs, lack of liquidity in the stock borrow market and year-to-date losses the threat of a short squeeze hovers over many stocks in the sector. If these Cannabis stocks can reverse todayâ€™s price weakness with positive earnings results from stocks like Canopy Growth (CGC US, WEED CN), a follow-on sector wide rally may shake some shorts out of their positions and squeeze stock prices even higher.
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Managing Director Predictive Analytics, S3 Partners, LLC
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