Since August marijuana stock short sellers are down an impressive $626 million as the cannabis markets bounced back from early year market volatility. According to a new report out from predictive analytics firm S3 Partners, short sellers have racked up losses totaling $490 million year-to-date, with the most significant losses coming after Constellation Brands $4 million injection of cash into Canopy Growth Corporation (TSX:WEED) (NYSE:CGC) last month.
Renewed interest in the cannabis sector increased short interest in the space by $458 million, or 44 percent since the end of Q2 of this year. Spread over 33 marijuana stocks and ETFs, short interests jumped to $1.5 billion according to the report, with short sellers eyeing up Tilray (NASDAQ:TLRY) and Canopy Growth more than any other company.
Both companies have led a sector-wide rebound, with Canopy’s Constellation deal fueling speculation of the next big cannabis buy-in. Just yesterday marijuana stocks pulled ahead even further on rumors that the Coca-Cola Company was in talks with Canadian Licensed Producer Aurora Cannabis, with the two looking to make a deal to produce non-psychoactive cannabis-derived beverages.
Tilray has also seen impressive gains recently, as the company’s stock shot up 47 percent over the last week following the receipt of regulatory approval to ship cannabis flower to Germany, Europe’s most significant marijuana market. Tilray was targeted by famed short-seller Andrew Left and his company Citron Research last week, in a report designed to knock share prices down a few notches.
Hoping for a pullback
According to the report from S3 partners, short sellers are betting large that the sector is “overheated” and ripe for a pullback. However, as the report notes, short interest has become costly recently. On average, it costs short sellers 21.8 percent in fees to borrow stocks in the cannabis sector, with $2.4 million a day going to financing costs. S3 notes that ETFs are slightly cheaper at 20.8 percent.
Moreover, according to the report, finding shorts in the sector is becoming increasingly difficult. Though it’s a popular short, Tilray stock borrows are ranging anywhere from 450 percent to 600 percent, while Cronos Group (NASDAQ:CRON) and The Green Organic Dutchman (TGOD), two other popular shorts are running at around 50 percent.
[Tilray dumps Namaste after Namaste shows why marijuana stocks aren’t ready for prime-time]
In fact, according to S3, the only reasonable fees right now are associated with GW Pharmaceuticals, whose fees are at 1 percent.
Who will come out on top?
As always, it depends. The market is set up for long positions right now, squeezing out short sellers. As S3 noted, with loan availability tight and fees exorbitantly high, long shareholders control the marijuana stock market at the moment. However, should something scare investors and force long shareholders to sell, then all bets are off. The sector is still young and as this year has proven, volatile. Whether the current rally holds, or as some have posited is based on nothing but pure speculation remains to be seen.