Are Cannabis Stocks the New Reddit Target?

Do the high short interest numbers in some cannabis stocks make the sector a Reddit target?

Total short interest in the almost 200 U.S. and Canadian cannabis stocks in our portfolio is $4.95 billion. Short selling is highly concentrated in a handful of names with short interest of the top 20 most shorted stocks in the sector at $4.86 billion, 98% of the total.

Short interest in our portfolio has increased by $1.81 billion over the last 30 days and $1.23 billion as the sector has rallied strongly. Canopy Growth Corp. continues to be the largest short in the sector, but Tilray Inc. has closed the gap significantly.

Cannabis Stocks Short Interest

Source: S3 Partners

We can see that short sellers have been trimming their positions into the sector’s rally with $1.54 billion of net short covering in the sector for the year. The major outlier in this short covering was Tilray Inc., which has seen over $1 billion of new short selling after its announced merger with Aphria Inc. as merger arbitrage traders built their positions.

We have seen a large amount of short covering, $1.33 billion worth, in Canopy Growth Corp. as shorts are getting squeezed out of their positions as its stock price rallied over 100% in 2021. Cronos Group also saw a +100% move in 2021 and squeezed shorts to the tune of $415 million of short covering. While GW Pharmaceuticals only had a +85% move in 2021, it had the second largest amount of short covering in the sector with $814 million of buy-to-covers.

Cannabis Stocks Shares Shorted

Source: S3 Partners

The large amount of short interest in some cannabis stocks, the limited supply in stock lending pools, and short squeezes already percolating in some cannabis securities could make the sector an attractive target for GME-like trading activity from the retail sector. Mark-to-market losses are already accumulating in most of the largest shorts in the sector, meaning there is already a large pile of dry powder ready to be lit to cause a short squeeze.

The top 20 cannabis shorts in the sector are down $4.32 billion in net-of-financing mark-to-market losses so far in 2021. The year-long rally has spurred short squeezes in most of the top 20 most shorted stocks in the sector and we may see the losses continuing, especially if the potential for nationwide U.S. cannabis legalization continues to increase.

There is not one stock in the top 20 that is a short-side winner. With general sector sentiment very positive, we can expect more general short covering as short sellers look for greener pastures elsewhere. But with short sellers already bloodied, full-blown short squeezes in many of these stocks may not be a surprise and long shareholders could have a tailwind of buy-to-covers helping drive stock prices even higher.

The cannabis sector exemplifies the fact that a short does not have to be crowded to become a short squeeze, large mark-to-market losses force short sellers out of their trades, and squeezes can occur in even thinly-shorted stocks. Continued price appreciation in the sector could squeeze more shorts out of the sector, and if these stocks become “Reddit” stocks, the squeezes may be more sudden and extreme and will likely come sooner rather than later.

Looking at short-selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities.

This article originally appeared in ShortSight.

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information in this report is not investment advice.