Total short interest in the over 200 U.S. and Canadian cannabis stocks in our portfolio is $2.45 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 $2.42 billion, 99% of the total. Short interest in the sector has increased by $706 million since the Russell 3000 market low on March 23rd , which includes $80 million of additional short selling. While short interest in the sector has increased from year-to-date low levels, it has actually decreased by just over $1.0 billion for the year which includes $182 million worth of short covering. Canopy Growth (CGC US\WEED CN) continues to be the largest short in the sector.
When looking at short interest as a percentage of float we do not see much movement over the last month besides Aurora Cannabis (ACB US\ACB CN) having an increase of 4% over the last month. SI % Float has not rebounded back to the sector’s beginning of year level of 24.20%, only 20.10% of the sector’s shares are shorted right now. Even with price weakness and inventory\ sales headwinds in the sector short sellers have reduced their positions earlier in the year and have not rebuilt them.
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 11.61% fee from 30.20% fee in 2020, a decrease of almost two-thirds. The biggest drop in stock borrow fees over the last month occurred in Canopy Growth (CGC US\WEED CN) with its fee falling from a trade killing 51.90% fee to a more palatable 9.23% fee. The top eleven shorts in the sector all saw stock borrow rate relief over the past month.
Stock borrow rate easing coupled with year-to-date profits in most of the most shorted stocks in the sector has drastically reduced the short squeeze potential of most of the names in the sector.
With both sector short interest and sector wide stock borrow fees down in 2020 we have seen stock borrow costs decline accordingly. Stock loan fees paid by short sellers declined below $1 million\day for short sellers for the first time in 2020. Daily stock loan fees paid declined by 73% from $2.90 million\day to $789 thousand\day for the year and is down 50% 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 short sellers have been profitable in the cannabis sector, up $403 million in net-of-financing mark-to-market profits in 2020 with nearly half those profits earned over the last 30 days. The big short-side winners were in Canopy Growth (CBC US\WEED CN), Cronos Group (CRON US\CRON CN), Aurora Cannabis (ACB US\ACB CN), Tilray (TLRY US) and Hexo Corp (HEXO US\HEXO CN) while the biggest loser was in the cannabis based Pharma stock GW Pharma (GWPH US). Cannabis sector short sellers were up $192 million in mark-to-market profits over the last 30 days, if profits continue to accumulate, we should see increased short selling as investors start to chase profits.
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.
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.