The rush in cannabis stocks has led short sellers to spend more betting against the industry, a new market report says.

A Monday (September 17) report from S3, a research firm employing data analytics for investment opportunities, shows that short sellers of cannabis stocks are down US$490 million year-to-date.

Short selling is described as the decision by an investor to sell a borrowed security based on the prediction that the stock will go down and be bought back for a lower price.

“Short sellers are positioning themselves for a pullback in what they believe is an overheated sector, but holding on to their positions is becoming an expensive proposition,” the report says.

The report shows that shorting cannabis stocks has increased this year, with short interest reaching US$1.5 billion across 33 stocks and exchange-traded funds (ETFs). The research firm states that most of the uptick in shorting has gone against Canopy Growth (NYSE:CGC,TSX:WEED) and Tilray (NASDAQ:TLRY).

According to S3, shorting cannabis stocks is becoming more expensive as these shares heat up in the public sector.

The firm explains that investors short selling these stocks are paying over US$2.4 million per day in stock borrow financing costs.

With ETF shorting, investors usually have a cheaper option to deploy bets against a sector, but with cannabis the ETFs have a 20.8 percent cost-to-borrow fee, the data indicates.

The report also shows short sellers are struggling to find new stock borrows for cannabis securities.

Stock borrows for Tilray increased between 450 and 600 percent on Monday, and those for Cronos Group (NASDAQ:CRON,TSX:CRON) and the Green Organic Dutchman (TSX:TGOD) have risen 50 percent for fee levels.

S3 predicts that long shareholders in the cannabis space could now become the “controlling force” of stock price movement with these issuers.

“Short sale activity will be relatively insignificant relative to long buying and selling pressure,” S3 states. “If short sellers get squeezed due to the triple threat of high stock prices, high stock borrow fees and stock loan recalls they will be forced to buy to cover their exposure.”

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However, the report notes that short sellers have an opportunity to end up on top if long holders start selling and lending programs regain stock to offer.

“[S]horts will find it easier to build their positions and offset some of the bullish sentiment we’ve seen in the sector over the last 5 weeks,” the report continues. “If short sellers can continue their third and fourth quarter growth then the cannabis rally may be on its last drags.”

Short selling tactic gains spotlight in cannabis market

This year short selling has been highlighted in the cannabis public space as companies combat the tactic.

Most recently, Cronos faced a decline in its share price when Andrew Left, founder of Citron Research, publicly shorted the Canadian producer.

report issued on August 30 by Citron gave Cronos a price target of US$3.50 compared at the time a price of US$12.74.

Shares of Cronos declined rapidly and suffered a loss of 28.41 percent after the report went live.

Outside of calling out short sellers and reminding investors of the company’s path, few cannabis companies have taken a stance against the activity.

As a way to combat short sellers, Namaste Technologies (TSXV:N) asked investors in May to sign a pledge and only hold or increase their stake in the company for 90 days.

The end result of this pledge was a party in Quebec last Wednesday (September 12) for Namaste shareholders.

Don’t forget to follow us @INN_Cannabis for real-time news updates and stay tuned for cannabis stories from the MoneyShow!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

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