Short-sellers are becoming more selective about betting against cannabis stocks, says IHS Markit report

Short-sellers are becoming more selective and have been reducing their exposure to certain cannabis stocks as their efforts to bet against the sector falter, according to a new report from research house IHS Markit.

Despite a minor pullback last week, the cannabis sector has been on fire lately, showing an average share price appreciation of nearly 30% since the start of August for US and Canadian stocks with exposure to the sector.

Indeed, cannabis stocks currently boast a market capitalization of US$48bn, after jumping by a staggering US$20bn since August, according to the Markit report.

While the rally is good news for investors, it has proved to be a tough run for short-sellers, who have been paring back their exposure to the space — from US$2.15bn immediately following the vote to legalize marijuana in Canada last June to US$1.5bn at the end of July.

Read: Namaste Technolgies CEO Sean Dollinger fires right back after Andrew Left calls the stock a ‘joke’

Short-sellers aren’t entirely “fleeing the space,” despite the massive cannabis sector rally and there have been selective additions made to short positions, while others are reduced.  

Indeed, the rally drove the short balance to a new record on September 13 of US$2.2bn.

Marking one of the biggest short positions, there are currently 56 million shares short in Aurora Cannabis, which closed at US$6.52 on Friday. There are also 21 million shares short in Cronos Group (NASDAQ:CRON) (TSE:CRON), which finished Friday at US$10.38 in New York.

But short-seller are steering clear of other stocks such as Canopy Growth (NYSE:CGC) (TSE:WEED), which has seen its shares nearly double to hover at US$47.19 since alcoholic-drinks maker Constellation Brands (NYSE:STZ) revealed plans last month to plow US$5bn into the company.

Since the start of August, there has been a 7.6-million share decline in Canopy short positions, according to Markit’s analysis.

“Short sellers have become, understandably, reticent remaining short the industry leader,” wrote Markit analysts.

Another hot pot stock, Tilray Inc (NASDAQ:TLRY), which has seen its share price soar from its US$17 at its public debut last July to over US$105, has also not been a strong play for short-sellers. After taking a long position in the stock on August 15, 2018, with a price target of US$45, the short-selling research house Citron Research switched sides on September 5 and took a short position after the share price hit US$77.  

Read: Tilray shares climb past US$100 for the first time as short-seller Andrew Left dubs the rally more ridiculous than bitcoin mania

But the call hasn’t played well for Citron, as Tilray shares closed on Friday at US$109.05. “That call hasn’t worked quite as well, with the share price up a further 50% since then,” according to Markit.

The current short position in Tilray is just 2 million shares. “There is little evidence that short covering has played a role in the upward trajectory of the shares, with the current short position being trivial compared with over 100mln shares traded since the start of August,” wrote Markit analysts.

Story by ProactiveInvestors