Short sellers make $450M on pot stocks
Cannabis short sellers made over US$450 million on the first two days of the week, cutting nearly a third off their year-to-date losses, according to data from financial analytics firm S3 Partners.
Pot stocks fell for six consecutive trading days beginning Oct. 16, the day before Canada legalized recreational marijuana. The BI Canada Cannabis Competitive Peers index tumbled 21 per cent from then through Tuesday’s close, and the Horizons Marijuana Life Sciences Index ETF, the largest pot exchange-traded fund, lost 20 per cent to its lowest level in two months.
The stocks opened higher Wednesday but gave up much of their early gains. Tilray Inc. rose as much as 5.8 per cent at the open but fell 9.84 per cent to close at US$108.90 in New York. Aurora Cannabis Inc. was down 5.58 per cent at US$7.27, on its second day on the New York Stock Exchange. Canopy Growth Corp. was down 7.92 per cent to US$37.76 after rising as much as 3.5 per cent.
The recent weeklong slide has been a boon to short sellers, who are shelling out huge fees to bet the stocks will fall.
The average fee on outstanding shorts in the cannabis sector is 15.4 per cent, with Tilray costing 72 per cent to borrow as a result of high demand and a small public float, according to Ihor Dusaniwsky, head of research at S3. Pot short sellers are paying over US$1.2 million a day to finance their borrow fees.
“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,” Dusaniwsky wrote in a note published Tuesday.