A recent S3 study shows that cannabis short sellers have had a rough couple of months, down $626 million with Tilray (TLRY.Q) and Canopy (WEED.T) shorters in the deepest water.
The report showed that short interest has rose to $1.5 billion spread over 33 cannabis stocks and ETFs, a +44%, since the end of the Q2 2018. Most of this increase was centered on increased short activity in Canopy Growth and Tilray, which were up $514 million in just over three months.
Short sellers are waiting for an eventual pullback in what they believe is a bubble. Turn on any mainstream media outlet to hear comparisons to crypto and dotcom bubbles. The dedicated shorters are banking on the probable idea that this type of sector wide growth is not sustainable over a long period of time.
The danger the shorters face is that some of these companies will hold their value long term. Shorters may begin to tire over time if the sector continues to heat up as the average cost to borrow stocks in the cannabis sector is a 21.8% fee, meaning short sellers are paying over $2.4 million/day in stock borrow financing costs.
Here are the largest short positions on the TSX, three of the top eleven are cannabis companies.
On the CSE, all of the top twenty largest shorts are cannabis companies.
In the last month infamous short outlet Citron has stated they are shorting:
The biggest risk when it comes to shorting is the potential for loss is infinite. Investing in a company usually means that when the stock hits zero, that’s as low as one can go. While shorting does seem like a profitable way to make money, betting against the wrong company could be devastating.
Take Canopy for example, If Canopy uses its 5 billion dollars from Constellation and builds the largest weed empire in the world that stretches across several continents and generates revenue that not only threatens other cannabis companies, but other industries as well (namely pharma, alcohol and tobacco) those shorters may be in for one hell of a ride.