Short interest of the 240 stocks in our cannabis portfolio increased by $205 million, or +5%, in 2020 as short sellers were active in the sector despite incurring year-to-date mark-to-market losses. Total short interest in our portfolio is $4.28 billion. Short selling in the sector remains very consolidated with the 20 most shorted stocks making up 83%, or $3.53 billion, of the total short interest in the sector and only six stocks with short interest over $100 million. The largest short in the sector continues to be Canopy Growth (CGC US\WEED CN) with $1.30 billion of short interest or nearly one out of every four short selling dollars going their way.
Shares shorted in the top 20 shorts in the sector increased by 47 million shares in 2020, worth an additional $201 million of short interest. But in February, while short sellers sold a net 24 million shares, short interest decreased by -$7 million as shorts bought to cover shares with higher stock prices than they sold short. For the year, the largest dollar amount of new short selling occurred in Tilray (TLRY US), Canopy Growth (CGC US\WEED CN), Aurora Cannabis (ACB US\ACB CN) and GW Pharma (GWWPH US). There was no cannabis stock that had a significant amount of short covering in 2020, with Hexo Corp (HEXI US\HEXO CN) and Organigram Holdings (OGI US\OGI CN) the only two stocks with total short covering over $2 million for the year.
Most stocks in the sector have both U.S. and Canadian listings and trading is fungible across both securities therefore it is necessary to look at stocks on both sides of the border to get a complete picture of short selling in the cannabis sector.
Short selling in the sector was a profitable trade in 2019, with the top 20 most shorted stock’s up just over $1 billion in mark-to-market profits. In 2020, cannabis short sellers have given back some of their 2020 profits and are down -$289 million in mark-to-market losses for the year. The most unprofitable cannabis shorts are Canopy Growth (CGC US\WEED US) and GW Pharma (GWPH US), down -$208 million and -$137 million respectively, while the winners are Aurora Cannabis (ACB US\ACB CN) +$48 million and Aphria Inc (APHA US\APHA CN) +$21 million.
Shorting stocks in the Cannabis sector is an expensive proposition and getting more expensive every day with stock borrow rates increasing by 3.14% fee in 2020. The average stock borrow fee for the cannabis sector is 30.89% fee and 36.64% for the top twenty most shorted stocks in the sector. The lack of stock borrow supply and continued short selling continues to drive stock borrow rates higher. There are three stocks, Canopy Growth (CGC US\WEED CN), Aurora Cannabis (ACB US\ACB CN) and Tilray Inc (TLRY US) trading with over a 50% fee.
In aggregate, total daily short financing costs for the entire sector is $3.67 million per day or $1.32 billion per year at these rates. The top 20 most shorted names in the sector cost short sellers $3.60 million per day or 98% of the total stock borrowing cost of the sector. Canopy Growth is by far the most popular short in the sector and it makes up more than half (53%) of the overall stock borrowing costs in the sector. With such a high cost of financing eating into short sellers’ Alpha there is a higher urgency to be correct quickly in their short thesis.
While short selling in the cannabis sector continues to grow, the lack of supply and high stock borrow costs will limit any significant increases in some of the most popular shorts. Short sellers may think twice about allocating resources to cannabis shorts with stock borrow costs over 30% fee which would take a substantial bite out of expected Alpha.
These expensive shorts would include Canopy Growth (CGC US\WEED CN), Aurora Cannabis (ACB US\ACB CN), Tilray Inc (TLRY US), Aphria Inc (APHA US\APHA CN), Hexo Corp (HEXO US\HEXO CN) and Charlotte’s Web (CWBHF US\CWEB CN).
Cannabis stocks that have seen an increase in short selling have slightly more reasonable stock borrow costs would be Canntrust Holdings (CTST US\TRST CN), MediPharm Labs Corp (MEDIF US\LABS CN) and Green Organic Dutchman Holdings (TGODF US\TGOD CN).
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Managing Director Predictive Analytics, S3 Partners, LLC
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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decisions.