Total short interest in the almost 200 U.S. and Canadian cannabis stocks in our portfolio is $4.95 billion. Short selling is highly concentrated in a handful of names with short interest of the top twenty most shorted stocks in the sector at $4.86 billion, 98% of the total. Short interest in our portfolio has increased by $1.81 billion over the last thirty days and $1.23 billion as the sector has rallied strongly. Canopy Growth Corp (CGC US, WEED CN) continues to be the largest short in the sector but Tilray Inc (TLRY US) has closed the gap significantly.
Change in short interest tells us the size of the short bets investors are holding in cannabis stocks, the increase and decrease in short interest has two components – change in a stock’s price (mark-to-market appreciation and depreciation) and change in shares shorted (short sales and buy-to-covers). While mark-to-market changes in investors’ positions do affect their profit and loss statements they do not have a direct effect on a stock’s trading price. Executing short sales and buy-to-covers directly affect a stock’s price which, alongside a long shareholder’s buying and selling, will move the stock’s bid\ask on a daily basis.
We can see that short sellers have been trimming their positions into the sector’s rally with $1.54 billion of net short covering in the sector for the year. The major outlier in this short covering was Tilray Inc (TLRY US) which has seen over $1 billion of new short selling after its announced merger with Aphria Inc (APHA US, APHA CN) as Merger Arbitrage traders built positions. We have seen a large amount of short covering, $1.33 billion worth, in Canopy Growth Corp (CGC US, WEED CN) as shorts are getting squeezed out of their positions as its stock price rallied over 100% in 2021. Cronos Group (CRON US, CRON CN) also saw a +100% move in 2021 and squeezed shorts to the tune of $415 million of short covering. While GW Pharmaceuticals (GWPH US) “only” had a +85% move in 2021 but had the second largest amount of short covering in the sector with $814 million of buy-to-covers.
With the large of amount of short covering occurring up and down the sector we saw Short Interest % of Float decrease by a 9.40% in 2021, falling from 24.17% on January 1st to 14.77% presently. The stocks with the largest yearly decrease in SI % of Float were Tilray Inc (TLRY US) and Cronos group (CRON US, CRON CN).
With total shares shorted and short interest as a percentage of float both down significantly in 2021 we see that stock borrow fees in the sector have declined appreciably with stock lending pools getting replenished with recent stock borrow returns.
The average stock borrow fee in the sector has decreased from 30.36% fee on January 1st to 4.26% fee today, a decrease of -86%. Stocks with over a 5% decrease in stock borrow fees are Sundial growers (SNDL US), Planet 13 Holdings (PLNHF US, PLTH CN), MediPharm Labs (MEDIF US, LABS CN), Hexo Corp (HEXO US, HEXO CN) Aurora Cannabis (ACB US, ACB CN) and Neptune Wellness Solutions (NEPT US, NEPT CN).
The reduction of stock borrow fees has made the Cannabis Sector a more reasonable group of stocks to short. While it is still more expensive than the average fee of 0.97% for the Russell 3000, stock borrow fees is no longer a barrier to putting on short positions in most cannabis stocks. To illustrate the negative effect of previous high stock borrow rates, cannabis shorts were paying $2.89 million in stock borrow costs per day on January 1st, putting a severe drag in Alpha generation. Today, daily stock borrow costs have dropped to $585 thousand per day, an 80% drop in trading expenses.
The top twenty cannabis shorts in the sector are down -$4.32 billion in net-of-financing mark-to-market losses so far in 2021, including down -$1.12 million in mark-to-market losses today. The yearlong rally has spurred short squeezes in most of the top twenty most shorted stocks in the sector and we should see the squeezes continuing, especially if the potential for nationwide U.S. cannabis legalization continues to increase.
There is not one stock in the top twenty that is a short-side winner. With general sector sentiment very positive we should expect more general short covering as short sellers look for greener pastures elsewhere. But with short sellers already bloodied, full blown short squeezes in many of these stocks should not be a surprise and long shareholders will have a tailwind of buy-to-covers helping drive stock prices even higher.
The Cannabis Sector exemplifies the fact that a short does not have to be crowded in order to become a short squeeze, large mark-to-market losses force short sellers out of their trades and squeezes can occur in even thinly shorted stocks. Continued price appreciation in the sector will squeeze more shorts out of the sector, and if these stocks become “reddit” stocks, the squeezes will be more sudden and extreme and will come sooner rather than later.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
Research Note written by Ihor Dusaniwsky, Managing Director of Predictive Analytics, S3 Partners, LLC
For deeper insight into short side data and analysis contact me at [email protected]
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