Short sellers in the cannabis space saw hefty gains of over US$250 million after Tilray reported a quarterly loss.
According to a new report by Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a short seller financial data and analytics firm, marijuana short sellers have faced challenges this year.
Before Wednesday’s (August 14) trading session, short sellers in the space had taken losses of US$951 million over a year-to-date period in the 20 top shorted cannabis stocks.
“Today these short sellers have recouped their August losses, up US$269.1 million in daily mark-to-market profits and now up US$11.7 million for the month of August, but still down -US$681.9 million year-to-date 2019,” the report states.
So far in 2019, the short interest in the cannabis market is up US$2.28 billion, the S3 Partners report indicates. The market action now carries an average borrow fee of 17.7 percent.
“Short selling is fairly concentrated to a handful of names, with the top 20 shorts making up over 85 (percent) of the total shorting executed in the sector,” Dusaniwsky wrote in the report.
On Wednesday, shares of Tilray dropped 15.17 percent in value to a closing price of US$39.04. During after-hours trading, the company was down an additional 0.1 percent.
The cannabis company, which is valued at US$3.8 billion, took in the drop after reporting a net loss of US$35.1 million for Q2 despite producing revenue of US$45.9 million.
“We are pleased with our second quarter results and strong business momentum,” Brendan Kennedy, Tilray’s president and CEO, said in a press release. “As we continue to grow, we remain focused on our long-term strategic objectives and deploying capital to maximize stockholder value.”
Overall, the marijuana sector is facing a decline as global markets react to losses on the Dow Jones Industrial Average (INDEXDJX:.DJI) seen on Wednesday due to a warning signal from the bond market resembling predictions for a recession.
S3 Partners projects a potential short squeeze for the cannabis space due to short seller activity.
A short squeeze takes place when a stock that’s been heavily shorted moves upward in value, causing short sellers to close their short position.
“With high financing costs, lack of liquidity in the stock borrow market and year-to-date losses the threat of a short squeeze hovers over many stocks in the sector,” the report explains.
“If these Cannabis stocks can reverse today’s price weakness with positive earnings results from stocks like Canopy Growth (NYSE:CGC,TSX:WEED), a follow-on sector wide rally may shake some shorts out of their positions and squeeze stock prices even higher.”
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.