Short trading in cannabis stocks is seen increasing further in the major companies of the sector because they remain a profitable, if expensive, bet for market players, a report by analytics company S3 Partners said Friday.
"We can expect more momentum short trading in the more largely shorted, more liquid and larger capitalized securities such as Canopy Growth Corp (NYSE:CGC), Aurora Cannabis Inc (NYSE:ACB), Cronos Group Inc (NASDAQ:CRON) and Tilray Inc (NASDAQ:TLRY)," said a report by Ihor Dusaniwsky, the managing director of Predictive Analytics at S3 Partners, a company that specializes in research on the short side of the market.
The rally in the cannabis sector in 2018 prompted short sellers to add billions of dollars of exposure since the middle of the year, as they bet on a reversal in what they feel is an overheated and overvalued sector.
Short interest in the Cannabis Sector has climbed to over $3.35 billion, with the biggest shorts being Canopy Growth $CGC, Aurora Pharma $ACB, Tilray $TLRY, GW Pharma $GWPH and Cronus $CRON. New research note: https://t.co/n6j5mZhXRS pic.twitter.com/txDP11KEGP— Ihor Dusaniwsky (@ihors3) November 9, 2018
"Short interest is now $3.35 billion in the 141 securities we track in our cannabis basket. While short interest in the sector continues to grow in 2018, exposure is very extremely concentrated, with 94% of the short interest in only 10 securities," said Dusaniwsky.
The cannabis sector gyrated sharply this week, rallying over 8% Wednesday on news that Attorney General Jeff Sessions' resignation would lead to a loosening of US cannabis policy. A day later, the stocks gave back most of their gains after investors realized immediate changes to the policy was not coming soon.
Short-selling the sector is profitable, but the cost to borrow the stock is steep, with the average borrow fee in the sector at 13.44% and short-sellers spending heavily for financing costs. The fee in other companies would usually be seen at much lower levels.
The rate to borrow Tilray stock is a 38% fee and that for Cronos is a 42% fee.
"We should expect short-selling in the cannabis sector to continue to grow, providing a slight counterbalance to the long buying frenzy and also providing trading liquidity in some of the less broadly traded securities," said Dusaniwsky.
He added: "As price volatility and momentum continues to increase in the sector, short sellers will become more active entering and exiting their positions as shorter term trades become larger Alpha generators."
Reporting by Rene Pastor, contactable on [email protected]