Short interest soars 52% in Q3

Short interest in high-flying cannabis stocks surged 52 per cent in the third quarter, and some investors say the wild price swings indicate there may be even more activity than the data reflect.

Total short interest in the marijuana space hit US$3.1 billion on Sept. 27, up from just over US$2 billion at the end of June, according to data from financial-analytics firm S3 Partners. That’s despite the fact that short sellers lost US$731 million in September as cannabis stocks soared.

“It’s multiple standard deviations away from the norm,” said Ihor Dusaniwsky, head of research at S3 Partners. “You just don’t have this much shorting across a full sector.”

Much of the increased shorting activity was centered on just two companies: Canopy Growth Corp. and Tilray Inc.

Volatility is common in the emerging pot sector, but Tilray in particular has been on a roller-coaster ride over the past month. On a single day in September, the pot firm’s shares nearly doubled before erasing the entire gain in less than an hour, only to finish up 40 per cent. The stock has gained more than 700 per cent since its July initial public offering.

This led investors to speculate that the stock was the victim of naked shorting, when an investor takes a short position without first borrowing the stock.

“Clearly there has been some monkey business going on,” said John O’Connell, chief executive officer of Toronto-based Davis Rea Ltd., an investment firm with about $600 million in assets. “The temptation to do naked shorting and all kinds of nefarious activities in this space is very high.”

Tilray has a very small public float of 10.3 million shares, just 13 per cent of its total shares outstanding, according to Bloomberg data. This means it’s extremely difficult to borrow for a short position, a fact that was reflected in the astronomical 600-per-cent fee that was being charged by brokerages in mid-September.

That has since fallen to 30 to 50 per cent, a number that’s “still extraordinarily high” compared to the single digits in most sectors, said Dusaniwsky.

“If I’m sitting here and I’m being charged 20 per cent, wow, my predicted return has to be pretty damn high in order to cover that and still leave me with a good net net return,” he said.