Throughout the fourth quarter of 2018, shorting cannabis stocks became a popular thing to do as stock prices in the marijuana industry tumbled, shedding most of their gains made in the first nine months of the year.
However, 2019 has seen this trend reverse with almost every cannabis company seeing their stock prices surge dramatically over the past couple of months. At the same time, companies that were previously under fire from known short sellers have emerged from these accusations relatively unscathed thanks to the results of independent investigations. Short-sellers have suffered significantly from this trend, and according to a newly released report, they have lost over $200 million collectively in February alone.
A new report released from the financial-analytics firm S3 Partners indicated that short sellers of marijuana stocks have collectively lost around $192 million in losses throughout February alone. The past few days have seen several cannabis companies gain several percentage points in a single day’s worth of trading, a rally that cost millions for these companies.
This estimate from S3 Analytics also doesn’t take into account the cannabis rally in January, which saw marijuana stocks across the globe surge 30 to 40 percent across the board. Taking this into account, short-sellers that held their positions since the beginning of the new year could have lost significantly more than the figure S3 Analytics reported.
“If losses for cannabis short sellers continue to mount we should see continued short covering and added upward price pressure boosting the profits of a growing community of long shareholders,” said Ihor Dusaniwsky, managing director at the firm. “With an average stock borrowing fee of 15%, short sellers will find it very expensive to hold onto short positions that are not adding positive numbers to their bottom line when the S&P and Nasdaq are up over 11% and 13% respectively. Eventually, there may be a short squeeze in several of these more shorted cannabis stocks.”
The most noteworthy short-sellers in the cannabis industry were Quintessential Capital Management (QCM) and Hindenburg Research, which published a series of investigative reports accusing Aphria’s (TSE: APHA)(NYSE: APHA) LATAM acquisitions of being fraudulent, insider-driven decisions.
Additionally, the short-sellers targeted other companies that have relations with Aphria, including Liberty Health Sciences (CNSX: LHS) and even going so far as to accuse Green Growth Brands’ (CNSX: GGB) hostile takeover attempt of Aphria as being motivated by insiders.
However, the past few weeks have vindicated these companies, as independent 3rd party investigations yielded that many of these accusations had errors. Liberty Health Science’s board of directors concluded earlier in February that “the Short Seller Report was materially inaccurate with the respect to key allegations and was presented in a misleading and inaccurate manner.”
Since then, it appears as if QCM and Hindenburg have largely retracted their positions. When QCM was asked whether or not it still felt Aphria’s stock price is worth $0, the company responded that was with the companies prior management team, but “with new management in place there is hope.”
Should the remaining short sellers in the cannabis market be forced to give up their positions and step back from the marketplace, these major companies could see significant boosts to their share prices as short sellers buy back the shares they’ve shorted. Overall, the report is a positive sign for the industry going forward into 2019.