No one would have guessed that some of the largest cannabis companies in the sector, previously heralded as forerunners in the industry, will end up falling to scrutiny.
That’s exactly what has happened to Canopy Growth (NYSE: CGC), the largest weed company in the world, having plunged in the last quarter amidst the loss of their figurehead CEO as well as reporting a staggering quarterly loss.
However, short sellers have already begun to target another major cannabis company, smelling blood in the financial waters so to speak. Aurora Cannabis (NYSE: ACB) has seen an increasing amount of short interest recently as the stock comes under additional scrutiny from the investment community.
For most of 2019, Aurora Cannabis has been Wall Street’s top cannabis stock. Vivien Azer, the top cannabis analyst on Wall Street, chose Aurora over its larger competitor, Canopy Growth, in a move that seems to have been validated in response to developments over the past couple of months.
Aurora has also become incredibly popular with millennials, ousting Apple as the most popular stock on Robinhood for the age group. Yet despite its seemingly solid public image, short sellers have increased their positions against the company.
Short interest in Aurora jumped by 33 percent in the last reporting cycle according to Fintel’s data. This figure has been steadily going up over the past three months, with the percentage of short interest in the company has gone up by 8 percent since May.
What this means is that institutional investors aren’t as optimistic about the company as one might expect them to be, which could potentially discourage long-term investments or even signal a coming collapse in the months to come.
The question here is why has this been happening? The most obvious answer would be that Aurora, in terms of size and scope, is most comparable to Canopy Growth. These two companies are the top business in the space, and Canopy’s recent decline might have hurt Aurora simply by association.
However, Canopy’s problems are fundamental more than anything superficial, with financial problems coming from unexpected losses. Aurora hasn’t shown this same issue so far. However, there are some reasons to be worried.
Last month, Aurora won a tender where it offered to supply a minimum of 400 kilograms of medical cannabis to Italy over a two-year period. While this was seen as a big win for the company, a report came out that claimed Aurora ended up significantly underbidding to win this contract. They had cut too deep into their own profit margins to win the deal, offering to sell weed for $1.94 a gram, a hair above its production costs.
While this is just one instance – albeit a major one – it does underscore that Aurora might have expanded to quickly in international markets, and this might be one of the main reasons why investors are becoming pessimistic in the stock.
Time will tell whether Aurora will have a fall from grace as well. So far, shares are down 30 percent or so in the past quarter, but the cannabis sector as a whole is down around the same amount, so the stock isn’t under performing the market in this regard.
