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Oct 23, 2018

S3 Analytics: Cannabis Shorts Up over $450 million on 2 Day Price Weakness

Cannabis stocks have been on a weeklong slide after a year-long rally prior to the full legalization of adult marijuana use in Canada. The ETFMG Alternative Harvest ETF (MJ US), Horizons Marijuana Life Sciences ETF (HMMJ CN) and Evolve Marijuana ETF (SEED CN) were up over 30% by October 15th and are now down over 20% since then, including over an 8% drop today.

At the moment, there is a large concentration of short selling in the sector, with only seven stocks having over $100 million in short interest and the top twenty shorts in the Cannabis sector making up over 98% of the total short interest in the sector.

Short selling in the Cannabis sector is not cheap, the average fee on outstanding shorts is 15.43% with one of the most popular shorts in the sector, Tilray Inc, costing 72% to borrow. Cannabis short sellers are paying over $1.2 million/day in stock borrow financing costs. One of the reasons for the high cost is the relative lack of institutional holders in these securities due to the fact that many of these securities trade in Canada or the OTC market in the U.S. which precludes some long only funds from holding them in their portfolios. A secondary reason may be the stock’s characterization as part of the “sin-stock” cabal along with tobacco, liquor, gambling and gun stocks which also precludes some long only funds from participating. Once institutional ownership increases in the sector we can expect stock borrow costs to decline significantly.

Shorts in the sector are up over $450 million in mark-to-market profits today and yesterday, cutting nearly a third off their year-to-date losses. Short interest in the sector continues to grow slowly as we saw some stock loan demand in Canopy Growth Corp (CGC US), Aphria Inc (APPHQF US) and Tilray Inc (TLRY US) today. If the cost to borrow cannabis stocks begins to cheapen in the larger cap names, we may see more short sellers enter this over-heated sector looking for stock prices to ease back down to more reasonable value based multiples. In the meantime, large institutional short sellers will be standing on the sidelines until the smoke clears and further large price drops will be due to longs shareholders selling stock to realize some of their profits.

Research Note written by Ihor Dusaniwsky
Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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