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Cannabis short-sellers picked up more than $450M in gains on two-day price weakness, says S3 Partners

There is a large concentration of short selling that can be seen in the sector, but institutional players are standing aside at this time

Wall Street.
Cannabis short-sellers are up sharply in the market

Short-sellers in cannabis stocks, which had been on an extended rally ahead of the legalization of marijuana in Canada last week, are up more than $450 million on recent price weakness in the sector, according to analytics company and short specialist S3 Partners.

A report by Ihor Dusaniwsky said the ETFMG Alternative Harvest ETF (NYSEArca:MJ), Horizons Marijuana Life Sciences ETF (HMMJ.TO) and Evolve Marijuana ETF (SEED.TO) were up over 30% by October 15th and are now down more than 20% since then, including an 8%-plus drop on Tuesday.

"At the moment, there is a large concentration of short selling in the sector, with only seven stocks having over $100 million in short interest and the top twenty shorts in the Cannabis sector making up over 98% of the total short interest in the sector," Dusaniwsky said.

Shorting the cannabis sector is not cheap, he added, with the average fee on outstanding shorts running between 15% and 43%, with the fee for Tilray Inc (NASDAQ:TLRY) alone costing up to 72% to borrow.

READ: Waiting to inhale? Cannabis stocks like Tilray are only going to go higher

"One of the reasons for the high cost is the relative lack of institutional holders in these securities due to the fact that many of these securities trade in Canada or the OTC market in the US. which precludes some long only funds from holding them in their portfolios," the S3 analyst said.

Another reason for institutional investors shying away from cannabis is the sector's characterization as a "sin" stock along with tobacco, liquor, gambling and gun stocks. This precludes some long-only funds from participating. "Once institutional ownership increases in the sector we can expect stock borrow costs to decline significantly," he said.

For now, the short interest in the sector is growing slowly with some demand seen in Canopy Growth Corp (NYSE:CGC), Aphria Inc (OTC:APHQF) and Tilray among others.

READ: Recent cannabis stock volatility not dampening industry prospects

"If the cost to borrow cannabis stocks begins to cheapen in the larger cap names, we may see more short sellers enter this over-heated sector looking for stock prices to ease back down to more reasonable value based multiples," Dusaniwsky said.

"In the meantime, large institutional short sellers will be standing on the sidelines until the smoke clears and further large price drops will be due to longs shareholders selling stock to realize some of their profits," he concluded.

Canada legalized cannabis on October 17. The sector has swung wildly in volatile trade and become a battleground between bulls and shortsellers in the market. 

Reporting by Rene Pastor, contactable on [email protected]  

Quick facts: Canopy Growth Corporation

Price: 25.94 CAD

Market: TSX
Market Cap: $9.63 billion

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