Cannabis stocks on the whole have been losing steam over the past quarter. While there definitely have been winners recently, with just recently Aphria (NYSE: APHA) surging by 30 percent in after-hours trading on surprising profits, as a general rule marijuana stock seemed to have lost some of their former appeal.
What we’ve seen is that short-sellers have been doubling down on the industry, increasing their bets that marijuana companies will fall as reality sets in for many of these formerly hyped up stocks.
Short sellers have been increasing the amount of exposure to the cannabis sector as a whole, with short interest in the top 20 most shorted weed stocks increasing by 78 percent to $1.89 billion. This comes as a bit of a surprise, as shorting these 20 stocks would have led to substantial losses, altogether representing a $690 million decline for short-sellers as the industry as a whole has still gone up.
“The rally we saw in cannabis stocks from late 2017 through 2018 has short-sellers jonesing for a price reversal in the sector,” wrote Ihor Dusaniwsky, managing director of predictive analytics for S3 according to MarketWatch. “The top 20 shorts were up $735 million in mark-to-market profits in July, reducing year-to-date losses to -$690 million. The big winners in July were Canopy Growth (+$301 million), Aurora Cannabis (+$173 million) and Cronos Group (+$82 million).”
At the same time, cannabis stocks are becoming more expensive to borrow for shorting purposes as demand for these stocks grow. Currently, its 21 times more expensive to borrow stocks from the marijuana industry then it is for the overall U.S. and Canadian market.
In both countries, there is a 16.75 percent fee to borrow cannabis shares, as opposed to the average 0.8 percent fee in the broader market. To put it another way, the average institutional cannabis short seller is paying around $2.4 million in daily stock borrow fees, which offsets much of any potential gains that could be made.
At the moment, the most expensive stock to borrow is Tilray, which has a relatively small float for its size and has a 41.3 percent fee. Aphria is next in line, with a 41.1 percent fee. Aurora Cannabis and Canopy Growth Corp have 26.1 and 25.9 percent fees respectively, but despite the financing costs as well as the extreme volatility in the sector, short-sellers haven’t folded in the face of these odds. In fact, they’ve only doubled down their bets.
While cannabis stocks saw a triumphant surge in the first quarter of 2019, they’ve given back much of those gains in Q2. Benchmarks for the marijuana sector, the ETFMG Alternative Harvest ETF and the Horizons Marijuana Life Sciences ETF, are up 8.5 percent and 10 percent respectively so far in 2019.
In comparison to the S&P 500 and the Dow Jones Industrial Average, this is fairly disappointing, with the more mainstream indexes gaining 18 percent and 14 percent over the same time period.
Time will tell how the industry fares in the future. One potential bull-sign coming soon is Canada’s second legalization coming in October, which would regulate CBD ingredients in consumables. This could lead to a surge in stock prices for select cannabis companies that operate in this market.
