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Dec 28, 2018

S3 Analytics: Profitable December for Cannabis Short Sellers

The mergers and acquisition activity in the Cannabis Sector continued today with Green Growth Brands Ltd. offering $2.1 billion in a hostile takeover of Aphria Inc (APHA). This follows Altria Inc’s announced $1.8 billion investment in Cronos Group (CRON); Constellation Brands purchase of 5.5% of Canopy Growth Corp (CGC); Molson Coors Brewing Co’s joint venture with HEXO Corp (HEXO); and Anheiser-Busch Inbev’s research partnership with Tilray Inc (TJRY).

After a lackluster December, Cannabis stocks rose on the takeover news with the ETFMG Alternative Harvest ETF (MJ) up 2.94% in mid-afternoon trading. But today’s price move only took small bite out of a strong close to the year for Cannabis short sellers, the ten most shorted stocks in the sector, which make up 95% of all shorts in the sector, are down $64 million in mark-to-market losses today. December mark-to-market profits for these stocks is a robust $432 million, bringing year-to-date mark-to-market trading in to the black, up $231 million.

Short exposure in the sector has actually declined in December, with short interest in the top ten most shorted stocks falling by $505 million, -17%, to $2.39 billion. The decline in short exposure was not necessarily due to cannabis short sellers covering their positions, but rather due to a broad decline of stock prices in the sector. Canopy Growth (CGC) had the biggest decline of short exposure in the sector, dropping from $1.03 billion of short interest down to $815 million, -21%, but its shares shorted actually increased by 160k, or +1%. Overall, shares shorted in the most shorted names in the sector increased by 7.51 million shares, or +3%.

One stock which had both an increase in short interest and shares shorted was Aphria Inc (APHA). Short interest increased from $131 million on December 1st to $222 million today. This 32% increase in $ short exposure coincided with a 72% increase in shares shorted. Aphria short sellers were actively shorting into its price decline, more than tripling the size of their short bets since the beginning of November.

If M & A activity continues in the Cannabis Sector we may see increased short covering boosting stock price performance. If stocks continue their recent upward trend, shorts may look to cover some of their exposure and realize their profits before they disappear in a puff of smoke. The U.S. market will be the primary reason for growth in the sector, increased Cannabis legalization in the U.S. coupled with increased hemp production and sales will make the existing cannabis related companies even more attractive takeover targets. Cannabis short sellers will be exposed to sudden and outsized price moves due to M & A activity, which may dampen future short sale activity, but for now shorts are partying into the new year.

Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC

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