Investors are spending hundreds of millions to short cannabis stocks, despite huge losses
It is costing as much as US$388,000 a day to short Tilray, for example, at a 38% borrow rate; losses have hit US$340 million
Investors are pumping more money into shorting pot stocks, despite the fact that doing so has resulted in estimated year-to-date losses of US$892 million, according to a U.S. firm that specializes in short-selling research.
Ihor Dusaniwsky, managing director for predictive analytics at S3 Partners, says his data show investors have spent US$1.4 billion shorting cannabis stocks in the United States and Canada since mid-year, but that they are struggling to find winning names.
“There is no cannabis short that is making more than US$20 million but there are several that are losing over US$100 million,” Dusaniwsky said.
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Investors are nevertheless continuing to test the sector, Dusaniwsky said, because they believe it is “flying too close to the sun” and is due for a reversal.
So far this year, Canopy Growth Corp.’s stock is up more than 73 per cent, while shares of Tilray Inc. have risen 541 per cent — the latter just since its July IPO.
According to S3’s data — which measure short sales for 141 cannabis securities in the U.S. and Canada — Canopy, Aurora Cannabis Inc. and Tilray are the top three companies being shorted when combining the short interest in dual-listed shares. These also happen to be the stocks that have seen short-seller losses in excess of US$100 million this year.
It isn’t just the positive overall performance of the cannabis sector that has posed a challenge for short sellers.
Currently, Dusaniwsky said, the shorts’ biggest problem is that it has been difficult for brokers to locate shares to borrow and as a result the cost to do so has become inflated.
Cannabis shares are mostly owned by retail investors, most of whom do not have the margin accounts necessary to borrow and lend shares, Dusaniwsky said. So high demand and low supply have resulted in borrowing fees that have reached the 30 to 40 per cent range and beyond, in some cases.
Investors looking to short shares of Tilray currently have to deal with a 38 per cent borrow rate, according to S3. With a total short position worth about US$415 million as of Friday, that means shorts altogether are paying approximately US$388,000 per day to short the company.
So far this year, shorting Tilray has been a costly trade, with total losses suffered by short sellers reaching US$340 million, according to S3.
You've got to be right and you've got to be right pretty quick or else the stock borrow price is going to eat into your (profits)
Those interested in Cronos Group will have to deal with a 42 per cent borrowing fee, while the highest borrowing fee — 50 per cent — belongs to shares of Mississauga, Ont.-based The Green Organic Dutchman Holdings Ltd.
Because of the borrowing costs, Dusaniwsky said, most investors cannot risk shorting cannabis stocks over the long term.
“You’ve got to be right and you’ve got to be right pretty quick or else the stock borrow price is going to eat into your (profits),” he said.
While they’re interested in shorting individual companies, investors have shied away from shorting ETFs such as the Horizons Marijuana Life Sciences Index ETF. Dusaniwsky said this might suggest that investors are still confident the sector as a whole will continue to perform well, but individual companies may not.
Going forward, long investors will continue to be enticed by the sector in hopes that a U.S. market solidifies, Dusaniwsky said, something that could bring more volatility — and more short sellers.Cannabis stocks rallied over 8% yesterday on euphoria that Attorney General Jeff Session’s resignation would bode well for U.S. cannabis policy. Today, clearer minds prevailed and cannabis stocks gave back most of yesterday’s run-up when investors realized the likelihood that there would be short term legislative changes to federal cannabis policy was unlikely. Source FP
And this article
It is costing as much as US$388,000 a day to short Tilray, for example, at a 38% borrow rate; losses have hit US$340 million
Investors are pumping more money into shorting pot stocks, despite the fact that doing so has resulted in estimated year-to-date losses of US$892 million, according to a U.S. firm that specializes in short-selling research.
Ihor Dusaniwsky, managing director for predictive analytics at S3 Partners, says his data show investors have spent US$1.4 billion shorting cannabis stocks in the United States and Canada since mid-year, but that they are struggling to find winning names.
“There is no cannabis short that is making more than US$20 million but there are several that are losing over US$100 million,” Dusaniwsky said.
Cannabis short sellers rake in over $450 million in two days in pot stock slide
Citron’s Andrew Left considering cannabis fund for long and short calls
Cannabis producers could be chasing global market worth $194 billion in seven years: BMO report
Investors are nevertheless continuing to test the sector, Dusaniwsky said, because they believe it is “flying too close to the sun” and is due for a reversal.
So far this year, Canopy Growth Corp.’s stock is up more than 73 per cent, while shares of Tilray Inc. have risen 541 per cent — the latter just since its July IPO.
According to S3’s data — which measure short sales for 141 cannabis securities in the U.S. and Canada — Canopy, Aurora Cannabis Inc. and Tilray are the top three companies being shorted when combining the short interest in dual-listed shares. These also happen to be the stocks that have seen short-seller losses in excess of US$100 million this year.
It isn’t just the positive overall performance of the cannabis sector that has posed a challenge for short sellers.
Currently, Dusaniwsky said, the shorts’ biggest problem is that it has been difficult for brokers to locate shares to borrow and as a result the cost to do so has become inflated.
Cannabis shares are mostly owned by retail investors, most of whom do not have the margin accounts necessary to borrow and lend shares, Dusaniwsky said. So high demand and low supply have resulted in borrowing fees that have reached the 30 to 40 per cent range and beyond, in some cases.
Investors looking to short shares of Tilray currently have to deal with a 38 per cent borrow rate, according to S3. With a total short position worth about US$415 million as of Friday, that means shorts altogether are paying approximately US$388,000 per day to short the company.
So far this year, shorting Tilray has been a costly trade, with total losses suffered by short sellers reaching US$340 million, according to S3.
You've got to be right and you've got to be right pretty quick or else the stock borrow price is going to eat into your (profits)
Those interested in Cronos Group will have to deal with a 42 per cent borrowing fee, while the highest borrowing fee — 50 per cent — belongs to shares of Mississauga, Ont.-based The Green Organic Dutchman Holdings Ltd.
Because of the borrowing costs, Dusaniwsky said, most investors cannot risk shorting cannabis stocks over the long term.
“You’ve got to be right and you’ve got to be right pretty quick or else the stock borrow price is going to eat into your (profits),” he said.
While they’re interested in shorting individual companies, investors have shied away from shorting ETFs such as the Horizons Marijuana Life Sciences Index ETF. Dusaniwsky said this might suggest that investors are still confident the sector as a whole will continue to perform well, but individual companies may not.
Going forward, long investors will continue to be enticed by the sector in hopes that a U.S. market solidifies, Dusaniwsky said, something that could bring more volatility — and more short sellers.Cannabis stocks rallied over 8% yesterday on euphoria that Attorney General Jeff Session’s resignation would bode well for U.S. cannabis policy. Today, clearer minds prevailed and cannabis stocks gave back most of yesterday’s run-up when investors realized the likelihood that there would be short term legislative changes to federal cannabis policy was unlikely. Source FP
And this article
With the cannabis sector rallying in 2018, short sellers have added almost $1.4 billion of exposure since mid-year, hoping for a reversal in what they believe to be an over-heated and over-valued sector. Short interest is now $3.35 billion in the 141 securities we track in our cannabis basket. While short interest in the sector continues to grow in 2018, exposure is very extremely concentrated, with 94% of the short interest in only 10 securities.
Shorts were down $292 million in mark-to-market losses Wednesday, -8.69%, which were almost totally wiped clean with Thursday’s $265 million in mark-to-market profits, +7.90%. We can expect more days of high volatility in cannabis as hopes for legalized U.S. marijuana sales grows with the newly elected Democratic majority in the House of Representatives. Along with these high hopes and spikes in stock price are more days of price reversals which will entice shorter term momentum short sellers to jump in and out of the market.
We can expect more momentum short trading in the more largely shorted, more liquid and larger capitalized securities such as Canopy growth Corp (CGC US & WEED CN), Aurora Cannabis (ACB US & ACB CN), Cronos Group (CRON US & CRON CN) and Tilray Inc (TLRY US).
While short selling and timing the cannabis market may be a profitable endeavor, there is a steep cost to enter the trade. Overall stock borrow costs are very high, with the average stock borrow fee in the sector being 13.44% fee and short sellers spending nearly $1.3 million per day in stock borrow financing costs. Several of the most shorted cannabis stocks have very high borrow costs with TLRY at 38% fee, CRON at 42% fee and TGOD at 50% fee. The seven remaining stocks in the top ten range from 0.57% fee to 5.94% fee.
Cannabis stock short sellers remain active and resolute in their conviction even though they are incurring year-to-date losses and paying high stock borrow fees and we are not seeing significant buy-to-covers in any of the most shorted name. As more long shareholders appear in stock lending programs stock loan rates should decline over the long term and short selling of cannabis stocks should become more attractive to a large set of short sellers as financing costs take a smaller bite out of net Alpha. And as price volatility and momentum continues to increase in the sector, short sellers will become more active entering and exiting their positions as shorter term trades become larger Alpha generators.
We should expect short selling in the cannabis sector to continue to grow, providing a slight counterbalance to the long buying frenzy and also providing trading liquidity in some of the less broadly traded securities.