Total short interest in the 230 U.S. and Canadian cannabis stocks in our portfolio is $2.80 billion. The top twenty most shorted stocks in the sector is $2.66 billion, 95% of the total. Short selling continues to be concentrated in just a handful of names which have the trading and stock borrow liquidity to support active and sizable short side activity. Today’s almost +12% rally in the cannabis sector has generated -$311 million in mark-to-market losses, bringing month-to-date losses to -$641 million. May’s losses have eaten away over three-quarters of short sellers’ year-to-date profits, they are up only +$180 million in the top twenty most shorted stocks in the sector.
The most shorted stocks in the Cannabis Sector:
Short selling in the cannabis sector has been relatively active over the last month with +$202 million of new short selling activity, and +$76 million worth of net short selling over the last week. Most of the short selling over the last month and week was in Aurora Cannabis (ACB US, ACB CN) with Canopy Growth (CCG US, WEED CN) and Cronos Group (CRON US, CRON CN) being the secondary choices for short sellers. We have seen active short covering in Aphria Inc (APHA US, APHA CN) over the last week and is the only cannabis stock with concerted short covering in the sector.
Short selling and covering in the Cannabis Sector:
Short selling in the Cannabis Sector has become a more expensive proposition over the last month with stock borrow costs of the twenty most shorted stocks in the sector averaging 32.11% fee. Stock borrow fees have increase by +12.82% fee over the last month and +7.26% fee over the last week. Short sellers in Aurora Cannabis (ACB US, ACB CN), Aphria (APHA US, APHA CN) and Tilray (TLRY US) had large increases in stock borrow costs as lendable inventory has been taken down and new lenders of stock have not emerged. We have seen stock borrow rates decrease significantly in some of the lightly shorted names, but this is less a demand and more of a supply story as a slight increase in supply availability has an outsized effect on their stock lending rates.
Cannabis stocks with rates over 10% fee make short selling a riskier proposition as stock borrowing costs take a large bite out of expected profitability (Alpha) and rates over 50% fee will drastically discourage increased short selling and are prime candidate for short squeezes. Aurora Cannabis (ACB US, ACB CN), Aphria (APHA US, APHA CN), Tilray (TLRY US) and Neptune Wellness (NEPT US, NEPT CN) all have stock borrow rates over 50% fee and we should expect increased short covering if their stock prices show any strength.
Overall short sellers in the top twenty most shorted stocks in the Cannabis Sector are paying $2.55 million in financing cost daily, which equates to $918 million of financing costs paid out on a yearly basis.
Stock Borrow cost in the Cannabis Sector:
Short sellers in the top twenty most shorted stocks in the Cannabis Sectors are down -$311 million in mark-to-market losses on today’s +11.68% rally. Only two of the top twenty most shorted stocks in the Cannabis Sector are slightly profitable with Aurora Cannabis (ACB US, ACB CN), GW Pharma (GWPH US) and Canopy Growth (CGC US, CGC CN) all down over $100 million in May with Aurora Cannabis faring the worst of the group, down over -70% for the month. With short sellers in most of these stocks still up for the year the threat of a loss based short squeeze is still minimal, but as losses mount short sellers may start trimming their positions in an attempt to salvage some year-to-date profits.
Mark-to-Market Profit & Losses in the Cannabis Sector:
Mark-to-market losses coupled with rising stock borrow rates are priming the pump for potential short squeezes in several cannabis stocks. The most likely candidates for a short squeeze are Canopy Growth (CGC US, WEED CN), Aurora Cannabis (ACB US, ACB CN), Aphria (APHA US, APHA CN) and Tilray (TLRY US). But the list can get longer if stock borrow rates continue to increase and losses mount.
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 as well as generate new trade ideas.
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Managing Director Predictive Analytics, S3 Partners, LLC
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