Total short interest in the over 200 U.S. and Canadian cannabis stocks in our portfolio is $2.85 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 $2.81 billion, 99% of the total. Short interest in our portfolio has increased by $1.15 billion since the Russell 3000 market low on March 23rd. While short interest in our portfolio has increased from year-to-date low levels, it has been relatively stable over the last 30 days, down only -$27 billion. Canopy Growth Corp (CGC US, WEED CN) continues to be the largest short in the sector by a wide margin.
Change in short interest tells us the size of the short bets investors are placing 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. Short selling 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 covering into the sector’s yearlong rally with $630 million of net short covering in the sector, $578 million in the top twenty most shorted stocks in the sector. The short covering was very evident over the last 30 days, as the post-election cannabis rally squeezed out some short sellers. The three largest short coverings were in GW Pharmaceuticals (GWPH US), Aurora Cannabis (ACB US, ACB CN) and Canopy Growth (CGC USA, WEED CN).
The large amount of short covering in 2020 has led to significant decrease in Short Interest % of Float. Overall, SI % of Float decreased by -30% in 2020, falling from 24.17% on January 1st to 16.99% presently. The stocks with the largest yearly decrease in SI % of Float were Tilray Inc (TLRY US), Zynerba Pharma (ZYNE US), Hexo Corp (HEXO US, HEXO CN), GW Pharma (GWPH US) and Canopy Growth (CGC US, WEED CN).
With total shares shorted and short interest as a percentage of float both down significantly in 2020 we see that stock borrow fees in the sector have declined appreciably. The average stock borrow fee in the sector has decreased to 5.00% fee from 30.36% fee in 2020, a decrease of -86%. The biggest yearly drop in stock borrow fees occurred in Canopy Growth (CGC US, WEED CN), Tilray (TLRY US), Hexo Corp (HEXO US, HEXO CN), Aphria (APHA US, APHA CN) and Aurora Cannabis (ACB US, ACB CN).
With both sector short interest and sector wide stock borrow fees down in 2020 we have seen daily stock borrow costs decline accordingly. Daily stock loan fees paid declined by 86% from $2.89 million/day to $397 thousand/day for the year and are down -32% over the last month. The decline in the cost to short stock in the sector has eroded much of the Alpha drag of high stock borrow fees. Shorts are now keeping more of their profits and paying less to their Prime Brokers making shorting cannabis stocks more attractive. As projected net of financing Alpha returns increase due to lower stock borrow fees more institutional short sellers may consider these stocks a more viable trading option.
Overall shorting the Cannabis sector has not been a profitable trade in 2020, but shorts were making up some of their November losses in December. Cannabis shorts are still down -$474 million in year-to-date net-of-financing mark-to-market losses for the year even after being up +$245 million in mark-to-market profits in December.
December’s profits are taking a hit today after Tilray (TLRY US) and Aphria (APHA US, APHA CN) announced a planned merger which would create a Canadian – U.S. cross border cannabis behemoth and will become the largest cannabis company worldwide. Tilray’s partnership with Anheuser-Busch InBev (ABI BB) would make this new firm a true international cannabis entity. Tilray shorts are down -$46 million in mark-to-market losses today while Aphria shorts are down -$9 million.
The underlying reasons for a short squeeze in the Cannabis sector were decreasing with the recent decrease in stock borrow costs and recent increase in mark-to-market profits, but the Tilray-Aphria merger may tighten the squeeze once again. Tilray shorts are now down for the year, -$40 million in year-to-date mark-to-market losses, and Aphria shorts are continuing their year-to-date losses and are down -$103 million for the year. We should see short covering in both these stocks in the near term.
Canopy Growth (CGC US, WEED CN) shorts are already down -$428 million in year-to-date mark-to-market losses and if we have a sector wide rally, we should see more short covering in the largest short in the sector.
We have seen over $100 million in short covering in both GW Pharma (GWPH US) and Aurora Cannabis (ACB US, ACB CN) over the last month and the Tilray-Aphria merger should just accelerate the buy-to-cover decisions of any GWPH and ACB shorts that are sitting on the fence. Both stocks were down slightly in morning trading, but if the rising tide of merger mania hits the sector additional mark-to-market losses will lead to continued short squeezes in both stocks.
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 Ihor.Dusaniwsky@S3Partners.com
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.