The hot start cannabis companies enjoyed to 2019 fizzled out in July, and short sellers jumped at the opportunity to add to their bets that the trend will continue, according to a new report.
Last month, net short positions in the cannabis space increased by 7.2 million shares, or $169.7 million, according to data from market tracker S3 Analytics.
The cannabis company that saw the highest uptick in short activity in terms of dollar bets against it was Canopy Growth (CGC), which parted ways with its CEO Bruce Linton to start the month. In total, short sellers added an additional $69.6 million worth of Canopy shares to short positions, despite higher than average borrowing fees.
The fact that Canopy topped the list of cannabis shorts in July shouldn’t come as that big of a surprise, according to Morgan Paxhia, co-founder of the cannabis-focused Poseidon Asset Management, who told Yahoo Finance’s YFi PM that shorting some of the larger cannabis names can often be easier due to availability. Canopy is the largest cannabis company in the world by market cap.
However, Paxhia did challenge the notion that the same sentiment that sent Canopy shares down by about 20% in July would carry over to the rest of the year.
“In 2019, we’ve seen quite a shift in investor scrutiny over the sector,” he said. “Even into Canada’s federal legalization last October most of the industry was predominantly trading around the idea of pro-forma — what was the future promising, what were these next big catalysts unlocking growth? ... Now we’re beyond a lot of those initial catalysts, even though there’s still a lot of growth to go left in this industry.”
Weathering the shift in sentiment in the cannabis sector proved easier for the marijuana-focused Alternative Harvest ETF (MJ) which only fell by about 11% for the month.
‘A natural reaction’
Jason Wilson, a partner in the ETF, added that July seemed like more of a readjustment as investors weigh a longer than expected investing horizon as more cannabis companies push out their path to profitability.
“This is to me a natural reaction with the big price run up at the beginning of the year,” he said. “Through this whole correction we’ve seen more creation more shares coming into the fund, so generally speaking, investors seem to be looking at this as the market maturing, companies working through growing pains, execution pains, but they still have their eyes on the prize which is global expansion and the size that the global market will be in the next 10 to 15 years.”
Interestingly, cannabis companies have in large part traded together, but both Paxhia and Wilson agreed that could change as investors weigh execution and profitability more heavily moving forward. Updates to both will come in shortly as more cannabis companies gear up to report earnings, with Canopy updating investors mid-August.