Prior to legalization, pot stocks could do no wrong. In Canada, many speculators flocked to the market before October 2018 in an effort to get a slice of the “Green Rush”, the belief that investing in cannabis firms would produce instant success once the shackles of illegality were removed from a potentially thriving industry.
Things didn’t quite work out that way, with regulatory hurdles sending most consumers to the black market and leading to a huge correction among pot stocks, and so shorting these stocks was very quickly in vogue. In fact, pot stock short-sellers made a cool US$1 billion last year, and with the current market uncertainty, you can expect 2020 to be just as successful.
The outbreak of the coronavirus has led to a massive spike in short selling, with savvy speculators betting on the struggles of industries like cruise liners, ride-hailing, and movie theatres. Many more sectors will be badly hurt by the slowdown in consumer demand, and the cannabis industry is no different. So, now is the ideal time to consider shorting already depressed pot stocks, and we’ve picked out the four most popular among short-sellers. Let’s take a closer look:
Top 4 Pot Stocks Targeted By Short Sellers: Canopy Growth (TSX:WEED) (NYSE:CGC)
Canopy Growth is the biggest cannabis company in the world, so its no surprise to see that it has also got the most short interest. Canopy’s current short interest volume is just under 12% of the total float, which is the lowest it has been in over year as the market remains bullish on the firm’s prospects of emerging from the current economic downturn relatively unscathed.
While the cannabis market continues to struggle, it could actually work to Canopy’s advantage and so shorting this pot stock may not be your best bet. The looming prospect of a recession is likely to cause more than a few small and medium cap players, and perhaps even some of the big boys, to buckle under the pressure. Canopy, as the market leader, would probably fill that void and thus be able to access a larger market share—particularly when its cannabis 2.0 portfolio is fully released.
Top 4 Pot Stocks Targeted By Short Sellers: Aurora Cannabis (TSX:ACB) (NYSE:ACB)
After Canopy, Aurora is the next biggest vertically integrated pot stock in Canada. The company’s performance over the last 12 months pretty much sums up everything that went wrong in the cannabis space. Aurora spent big straight out of the gate on building massive cultivation facilities before demand failed to live up to expectations, leaving the firm heavily out of pocket.
Escalating losses and out of control expenses led to an 85% drop in Aurora stock over the last 12 months, and it became clear early this year that restructuring was in order. In February, Aurora announced that it was laying off 500 staff members, and its longtime CEO and co-founder Terry Booth was retiring; however, the announcement was not enough to stop the pot stock falling below the $1 mark last week.
Aurora’s short volume ratio is currently 13.10, with the stock up 2% on Tuesday to trade at $1.01.
Top 4 Pot Stocks Targeted By Short Sellers: Cronos Group (TSX:CRON) (NASDAQ:CRON)
While Cronos’s stock performance in 2019 follows a very similar trend to Aurora, losing as much as 80% of its value in the year-to-date period, the company’s financial position is slightly more shored up. Cronos has the backing of tobacco giant Altria Group (NYSE:MO), which purchased a 45% stake in the pot stock last year for around US$1.8 billion. That deal will give Cronos exclusive access to Altria’s vape technology, which could be of major benefit to Cronos in the Cannabis 2.0 market.
Interestingly, Cronos has delayed the publication of its most recent financial results and has said that it will have to restate the last three quarters due to an internal review of its bulk resin purchases and wholesale revenues. This uncertainty has made Cronos a prime target for short-sellers, with the stock’s short volume ratio standing at 25% and on an upward trajectory over the last year.
The company aims to file its fiscal 2019 financial statements by March 30 but cautioned that the COVID-19 pandemic could impact the deadline, so expect Cronos to be highly shorted over the next few weeks.
Top 4 Pot Stocks Targeted By Short Sellers: MedMen Enterprises (CSE:MMEN) (OTCQX:MMNFF)
MedMen is the only non-Canadian domiciled pot stock on this list, but its performance over the last year has been no less brutal—to the point it was even ridiculed by the TV series South Park. Trading at around $4.50 this time last year, MedMen stock now sits at just $0.16, and that’s mostly down to just bad management.
Concerns regarding MedMen’s financial health had been floating around for quite a while, but really came to the fore last month when it emerged that the company was attempting to make vendor payments with stock options. Controversial CEO Adam Bierman took to Reddit to attempt to allay these fears in an AMA, but his failure to really address the pertinent issues backfired massively, and less than a week later, he was out of a job.
Control of the company now rests with investment firm Wicklow Capital, which is moving quickly to ditch MedMen’s struggling cultivation assets and transitioning solely to retail. MedMen currently has a short interest ratio of 15%.
The Bottom Line
Investors looking to jump into a short position on a pot stock now will pay handsomely to do so. The average cost to borrow stock across the entire sector is 26.5%, and 30.5% among the top 20 names, costing about $2.8 million a day or $1.01 billion at those rates. As market uncertainty sends savvy short-sellers flocking to the likes of cruise ship and airline stocks, there remains big potential in the cannabis market for speculators to collect a tidy paycheque.