Cannabis Short Sellers Down $272M Following Canopy Growth Upgrade

After a brutal start to the month for cannabis investors, the ETF MANAGERS TR/TIERRA XP LATIN AME MJ has rallied 8.6% this week on the heels of a Canopy Growth Corp CGC upgrade by Bank of America.

Bank of America upgraded Canopy to Buy on Wednesday, triggering a 30.9% two-day rally in Canopy shares and bullish sympathy trading in other popular cannabis stocks.

The Numbers

Short sellers have aggressively piled into cannabis stocks in 2019, with short interest up $389 million to $3.5 billion year to date. Short sellers are paying a steep price to bet against cannabis, with the average cost to borrow at 23.4% for cannabis stocks.

Aurora Cannabis Inc ACB is the most expensive cannabis stock to short with a 66.5% borrow fee.

Even after this week’s rally, Canopy shares are still down 25.5% year to date and remain the most profitable cannabis short of the year. As of Wednesday, Canopy short sellers were sitting on a year-to-date profit of $332.4 billion.

Exclusive: Canopy Growth's CEO On The Cannabis Company's Stock Price, Growth Potential, Global Footprint

Reallocation Ahead?

Prior to this week’s rally, the month of November had been a home run for cannabis short sellers, who were up $499.7 million this month. Those gains took a $272 million hit on Wednesday, and short sellers are on track for another day of heavy losses on Thursday morning as well.

S3 Partners analyst Ihor Dusaniwsky said traders can expect Canopy short sellers to reallocate to more attractive cannabis short targets.

“Shorts will probably reallocate their exposure to other stocks in the sector as turnarounds occur, but not swap into another sector until a more widespread rally begins,” Dusaniwsky said.

The following are the five largest cannabis short positions as of Wednesday:

• Canopy Growth: $836.8 million in short interest.
• GW Pharmaceuticals PLC- ADR GWPH : $544.8 million in short interest.
• Aurora Cannabis: $435.9 million in short interest.
• Cronos Group Inc CRON: $373.7 million in short interest.
• Aphria Inc APHA: $169.5 million in short interest.

Benzinga’s Take

Cannabis stocks will likely continue to be volatile in the near term while the industry matures. Investors should be cautious about reading too much into this week’s bounce until underlying cannabis market fundamentals show real signs of improvement.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.