Recent positive news and sector chatter has led to massive move on upside for various Cannabis stocks. In addition, with high short-interest, and borrow-rate, short-squeezes have formed pushing these stocks further up. Stocks like Tilray (TLRY US), Canopy (WEED CN), GW Pharmaceuticals (GWPH US) or Aurora (ACB CN) are excellent stocks to look at with all these characteristics to express opinion as investor in both directions.
Askbrokers has extensively covered the Cannabis sector through various articles about the sector and specific companies. There might be signs of overheating in the sector starting to ferment. For example, today it was announced that Tilray (TLRY US), a company we have covered before, has received FDA approval to import Cannabis to US for medical studies. CNBC elaborates.
Tilray will work with the University of California San Diego Center for Medicinal Cannabis Research to study the safety, tolerability and efficacy of marijuana for a neurological disorder.
As a result of this Tilray (TLRY US) stock rallied over 20%, reaching a market cap of almost $14bn.
Source: Yahoo Finance
The company’s market-cap has increased over $4bn over the last week, and this is for a company that did less than $20m in sales for 6 months of 2018. The story has been the same with a lot of the stocks within the space, for example Aurora (ACB CN) as we mentioned earlier being in talks with Coca Cola (KO US) about a future ollaboration.
With these parabolic moves higher, more and more parties have decided to short various Cannabis companies. S3 Partners note that there has been an increase of 44% of short-interest since end of Q2.
Short sellers have been very active in the cannabis sector this year, with short interest climbing to $1.5 billion spread over 33 stocks and ETFs. This is a $458 million increase in short interest, +44%, since the end of the second quarter. Most of this increase was centered on increased short activity in Canopy Growth and Tilray, which were up $514 million in just over three months.
As positive news in various forms have been announced within the sector, and the shares rising, not only have people short these stocks suffered massive losses, but also it has become more and more expensive to receive borrow (to be able to short stocks – one must for borrow the stock, and one has to pay a borrowing fee – sort of an interest-payment) to short these stocks.
Currently, for example currently borrow-rates for Tilray (TLRY US) is between 450-600% (usually these rates are around 2-5%, and 10-15% is considered high). This means that it is practically impossible to express a view that these stocks will go down given the high borrow rates.
Below is a good table of short-interest, borrow-rate and so forth for the major companies in the sector.
Source: S3 Partners
With these high level of short-interest, and borrow, the ground for further rallies could be setting up, as parties that are short might be forced to cover their positions, and thereby push the stocks even higher. This virtuous cycle, which investors covering their shorts, pushing up the share price, the short squeeze, often results in parabolic irrational moves higher.
As a cautionary tale, often when stocks go parabolic like they have in the Cannabis sector, with high short-interest, and very expensive borrow, often means that at least short-term these stocks might take a breather in their moves higher. Summary: Cannabis stocks have recently have an explosive movement up, both on news announcement and potential talks of JVs and m&a. On top of that, with high short-interest and borrow-rates for investors/traders looking to short – there has been short-squeezes pushing the stocks in the sector higher up. This might continue, or end abruptly. As trader one can play directions through options as well.
