As marijuana markets continue to plummet, short sellers have profited by hundreds of millions of dollars collectively from the decline of cannabis stocks over just the past couple of days. Marijuana stocks have continued to fall for the past six trading days, with the trend starting the day before legalization day and showing no signs of stopping, according to a new report by predictive analytics firm S3 Partners.
Major cannabis companies have been declining across the board, with market-wide index’s such as the Horizons Marijuana Life Sciences Index ETF dropping 20 percent over the past couple of days. Ihor Dusaniwksy, analyst for S3 Partners, tweeted earlier today that “Cannabis stock short sellers up $450 million in mark-to-market profits over the last two days of price weaknesses.”
“At the moment, there is a large concentration of short selling in the sector, with only seven stocks have over $100 million in short interest and the top twenty shorts in the Cannabis sector making up over 98% of the total short interest in the sector,” said Dusaniwsky according to the report.
Being a short seller in the cannabis market isn’t cheap by any means, with fees for shorting being quite costly given the demand for shares. While the past week has been quite good for bearish-speculators, the average fee for outstanding shorts in the market average at 15.4 percent, with Tilray costing as much as 72 percent to borrow due to demand and the relatively small public float.
“One of the reasons for the high cost is the relative lack of institutional holders in these securities due to the fact that many of these securities trade in Canada or the OTC market in the US, which precludes some long-only funds from holding them in their portfolios,” Dusaniwsky added. “If the cost to borrow cannabis stocks begins to cheapen in the larger cap names, we may see more short sellers enter this over-heated sector looking for stock prices to ease back down to more reasonable value-based multiples. In the meantime, large institutional short sellers will be standing on the sidelines until the smoke clears and further large price drops will be due to longs shareholders selling stock to realize some of their profits.”
Almost every Canadian province has been struggling with supply shortages, alongside a host of other issues preventing cannabis companies from growing their cultivation capacities as quickly as they’d like. With a looming Canada Post strike on the horizon, many have considered Canadian cannabis companies poorly prepared for the post-legalization demand. Coupled with concerns over the relative expensiveness of marijuana companies when seen through the lens of traditional financial metrics, it’s created the perfect environment for bearish trends such as these to emerge.
According to CNBC, Canopy Growth CEO Bruce Lipton spoke on the subject of the Cannabis sell-off, mentioning that traders have likely chosen to lock in on their profits, and that there is going to be a transition for “retail holders to institutional holders.” In the future he hopes that this volatility will stabilize as these short-term traders start exiting the market.
At this rate, however, it might take a while before such a thing happens, and long-term investors will simply have to endure this price decline for however long it will last.