By Ciara Linnane, MarketWatch
Short sellers, or those betting stocks will fall, have steadily increased their exposure to the cannabis sector this year with short interest in the top 20 most shorted stocks climbing 78% to $1.89 billion, according to financial analytics firm S3 Partners.
The increase has come even though short sellers have not had a profitable year with the 20 most shorted stocks garnering $690 million in year-to-date losses, according to Ihor Dusaniwsky, S3’s managing director of predictive analytics.
“The rally we saw in cannabis stocks from late 2017 through 2018 has short sellers jonesing for a price reversal in the sector,” he wrote in a new report published Thursday.
Short sellers take a view on a stock that it will fall in price. They then borrow the shares so they can sell them, hoping they can later scoop them up at a lower price, return them to the original lender and pocket the difference.
The cannabis sector has hit a summer slump following a series of scandals and continued regulatory deadlock. A crop of weaker-than-expected earnings from Canadian licensed producers, the ousting of Bruce Linton from market leader Canopy Growth Corp. and a scandal involving illegal growing at CannTrust Holdings Inc. have weighed on stock prices.
The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -0.30% has fallen 24% in the last three months, while the Horizons Marijuana Life Sciences ETF /zigman2/quotes/208856346/delayed CA:HMMJ -0.92% has declined 26%.
For more on this story, see: Cannabis companies are having a horrible summer as scandals mount and stocks slide
At the midyear point, the biggest losers were those who had shorted shares of Canada’s Aurora Cannabis /zigman2/quotes/210559470/composite ACB +3.80% /zigman2/quotes/203734337/delayed CA:ACB +5.83% , who were facing losses of $274 million, according to S3.
Canopy Growth /zigman2/quotes/200603886/composite CGC -0.86% /zigman2/quotes/202205609/delayed CA:WEED -3.00% short sellers were in the red to the tune of $227 million, GW Pharma /zigman2/quotes/209686240/composite GWPH -2.31% short sellers were down $167 million and Cronos Group /zigman2/quotes/206842762/composite CRON -1.77% /zigman2/quotes/202715342/delayed CA:CRON -1.14% short sellers were losing $85 million.
On a brighter note, short sellers of Tilray Inc. /zigman2/quotes/209129655/composite TLRY -1.67% had profit of $64 million, while short sellers of CannTrust Holdings /zigman2/quotes/201332942/composite CTST +1.30% /zigman2/quotes/206800806/delayed CA:TRST +2.30% had profits of $53 million and short sellers of Hexo Corp. /zigman2/quotes/206508254/composite HEXO -3.29% were looking at gains of $21 million.
CannTrust shares have plunged 58% in the past month after Health Canada seized more than five metric tons of the company’s cannabis after discovering it was growing in unlicensed rooms.
The selloff intensified after the Globe and Mail uncovered email traffic showing top management was aware of the illegal grow and a Danish partner confirmed that some of the product had been exported. The company pushed out Chief Executive Peter Aceto, and President Eric Paul resigned. A special committee continues to investigate the matter, and on Wednesday, hired Greenhill & Co. Canada Ltd. to help the company explore its strategic options, including a possible sale of the company.