Short-sell­ers re­new bear­ish bets on cannabis com­pa­nies

The Globe and Mail (BC Edition) - - REPORT ON BUSINESS | GLOBE INVESTOR - LARRY MACDONALD

More short-sell­ers are plac­ing bets that mar­i­juana stocks are headed down­ward as five cannabis stocks hit the lat­est short-sell­ers lists pub­lished by The Globe and Mail.

The five were: Aphria Inc., Canopy Growth Corp., Cannabis Wheaton In­come Corp., MedMen En­ter­prises Inc. and Delta 9 Cannabis Inc. Short-sell­ers’ bear­ish views on the fledg­ling in­dus­try thus ap­pear to have ac­quired more con­vic­tion in re­cent weeks.

Of course, the le­gal­iza­tion of cannabis in Canada and sev­eral states within the United States cre­ates a sub­stan­tial com­mer­cial op­por­tu­nity. But short-sell­ers seem to be say­ing that the runup in mar­i­juana stocks over the past 18 months may be over­es­ti­mat­ing the growth po­ten­tial.

The first graphic shows the top 20 Cana­dian com­pa­nies in terms of the per­cent­age of shares on loan as of June 12. Shares on loan serve as a proxy for short sales be­cause short-sell­ers have to first bor­row shares in or­der to sell. These data are supplied by global data firm IHS Markit from their daily sur­veys of bro­kers in the se­cu­ri­ties-lend­ing mar­ket.

In­vestors short­ing a stock bor­row the shares from a bro­ker, sell them and hope to re­place the shares that they’ve bor­rowed at a lower price in the fu­ture and pocket the dif­fer­ence. It’s a bet that a stock’s price will drop.

Bad­ger Day­light­ing Ltd., Que­becor Inc. and First Ma­jes­tic Sil­ver Corp. once again topped the ta­ble. Bad­ger Day­light­ing’s first­mover sta­tus in hy­drovac trucks (used for earth ex­ca­va­tion) is fac­ing ris­ing com­pe­ti­tion; Que­becor is a me­dia com­pany where the short in­ter­est may largely re­flect ar­bi­trag­ing/hedg­ing of its con­vert­ible deben­tures; and First Ma­jes­tic Sil­ver is a Mex­ico-based sil­ver miner with some past ex­e­cu­tion mis­cues and a large ac­qui­si­tion to di­gest.

Most of the other in­cum­bents saw changes in their rank­ings. Some of the in­creases in short po­si­tions were reg­is­tered by Cana­dian Western Bank, Maxar Tech­nolo­gies Ltd. and WestJet Air­lines Ltd. Cana­dian Western Bank is based in Al­berta, where the risk of loan losses has grown be­cause of the un­der­per­form­ing econ­omy; Maxar Tech­nolo­gies is di­ver­si­fy­ing away from a slow­ing satel­lite busi­ness into dig­i­tal Earth im­agery – while car­ry­ing a heavy debt load; and WestJet Air­lines is deal­ing with higher fuel prices and in­creased com­pe­ti­tion from dis­count car­ri­ers.

Two new faces in the first list are cannabis firms Aphria and Canopy Growth. Aphria, one of the lower-cost grow­ers, has seen its stock slide this year af­ter a big run-up in 2017. Canopy Growth is con­sid­ered the dom­i­nant firm in the sec­tor but its val­u­a­tion is rich and uncertainties abound, such as gov­ern­ment reg­u­la­tions and a po­ten­tial for a sup­ply glut from the plethora of new pro­duc­ers rush­ing in.

The sec­ond graphic ranks the 20 Cana­dian com­pa­nies with the high­est cost to bor­row their shares. The cost to bor­row is an­other way to gauge bear­ish sen­ti­ment. It is par­tic­u­larly use­ful when the num­ber of shares avail­able for bor­row­ing is small and short-sell­ers re­veal their bear­ish sen­ti­ment less through the num­ber of shares sold but by how high they bid up bor­row­ing costs.

Con­cor­dia In­ter­na­tional Corp. and Street Cap­i­tal Group Inc. are at No. 1 and No. 3 on the list, re­spec­tively. Con­cor­dia In­ter­na­tional is a go­ing con­cern as it at­tempts a tran­si­tion to a new busi­ness model. As a mort­gage lender, Street Cap­i­tal is ex­posed to the Cana­dian hous­ing sec­tor, where some ob­servers say prices have in­creased to un­ten­able lev­els.

There are also com­pa­nies from sec­tors that have be­come richly val­ued from in­vestors stam­ped­ing in, such as lithium (used in elec­tric cars) and cannabis. The lat­ter sec­tor alone has seven en­tries on the sec­ond list.

Sev­eral new com­pa­nies have landed on the sec­ond list this month: Let’s look at some of them.

Cannabis Wheaton, to be re­named Auxly Cannabis Group Inc., pro­vides fi­nanc­ing to mar­i­juana pro­duc­ers in re­turn for an eq­uity stake and share of their out­put. The com­pany had rev­enue of just more than $600,000 in the last quar­ter and is val­ued at $700-mil­lion on the Cana­dian Ven­ture Ex­change.

MedMen En­ter­prises, an up­scale cannabis re­tailer in the United States, listed for trad­ing on the Cana­dian Se­cu­ri­ties Ex­change in May. It aims to raise cap­i­tal to ex­pand oper­a­tions faster. It is val­ued at $1.4-bil­lion and cur­rently has 12 stores in New York State, Ne­vada and Cal­i­for­nia.

Delta 9 Cannabis was one of the first com­pa­nies to be li­censed for com­mer­cial med­i­cal cannabis pro­duc­tion in Canada. But the com­pany hasn’t ag­gres­sively scaled up to grab mar­ket share, so it re­mains a niche player in Man­i­toba and has a de­clin­ing share price. Brook­field Prop­erty Part­ners LP is fo­cused on com­mer­cial prop­er­ties. As with other com­pa­nies with a high-yield­ing stock and sub­stan­tial debt, it has been un­der pres­sure be­cause of ris­ing in­ter­est rates. Other con­cerns: the im­pact of on­line shop­ping on bricks-and-mor­tar re­tail­ers and a di­lu­tive is­sue of new shares.

Resver­logix Corp. is a clin­i­cal stage biotech com­pany de­vel­op­ing an in­hibitor for the treat­ment of car­dio­vas­cu­lar, di­a­betes, Alzheimer’s and other dis­eases. A lot rides on whether or not the com­pany’s pro­posed treat­ments be­come com­mer­cially vi­able.

Short-sell­ers seem to be say­ing that the run-up in mar­i­juana stocks over the past 18 months may be over­es­ti­mat­ing the growth po­ten­tial.

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