U.S. Investing

Cannabis Corner: Short Sellers Stay Stubborn

It is an open secret that the Big Cannabis stocks have attracted a lot of opportunistic negativity. The industry took off too fast and now that the mood has gotten more realistic, it will take time to recover.

I remain bullish on the long term. The right portfolio of these stocks will make high-conviction investors very happy when the business matures.

For now, however, there isn’t a lot of instant gratification here beyond the occasional surge when the short sellers cover their positions. While consolidation is happening, it’s too slow to do anything more than relieve a little pressure.

It felt great for shareholders in Aurora Cannabis Corp. (NYSE:ACB), Canopy Growth Corp. (NYSE:CGC) and Tilray Inc. (NASDAQ:TLRY) when CannTrust Holdings Inc. lost its NASDAQ listing. But the bears still control the game here.

Roughly 20% of each of those companies is currently tied up in short contracts. That’s a direct indication of the level of negativity these stocks face.

When the cannabis bears cover, they come back for another ride to the downside. Elsewhere in the market, short sellers have a reason to be a lot more cautious.

Short interest for the S&P 500 as a whole rarely increases beyond 3% of the shares available. Anything more aggressive becomes a problem when the bets go against you.

That, of course, is the infamous short squeeze, when people who need shares fast to cover expiring positions pay high prices to exit. All it takes is long-term investors refusing to hand over their stock until the clock on the short side ticks down.

I don’t see a squeeze ahead for most of Big Cannabis because these stocks are liquid enough to give the bears plenty of opportunities. These shares are circulating. All the shorts need is to wait a day or two to accumulate what they seek.

One day the bulls will draw a firm line and the bears will need to surrender. When you see these stocks rally for a few days in a row, the odds are pretty good that the shorts are getting nervous.

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. The Financial Times describes Ms. Kramer as “A one-woman financial investment powerhouse” and The Economist distinguishes her as “one of the best-known investors in America”. Ms. Kramer is often quoted in publications such as the Wall Street Journal, New York Post, Bloomberg, and Reuters. She is a frequent guest commentator on CNBC, CBS, Fox News and Bloomberg, providing investment insight and economic analysis. Ms. Kramer was an analyst and investment banker at Morgan Stanley and Lehman Brothers. Ms. Kramer founded and ran a long-short hedge fund and has been chief investment officer overseeing debt and equity portfolios. Since 2010, Ms. Kramer’s financial publications have provided stock analysis and investment advice to her subscribers. Her products include GameChangers, Value Authority, High Octane Trader, Triple-Digit Trader, 2-Day Trader, IPO Edge and Inner Circle. Ms. Kramer, a Certified Fraud Examiner, has also testified as an expert in investment suitability, risk management, compliance, executive compensation, and corporate governance. Ms. Kramer received her MBA from the Wharton School at the University of Pennsylvania and her BA with honors from Wellesley College. Ms. Kramer has provided testimony regarding investment policy to the U.S. Senate and is a frequent speaker on the markets, portfolio management and securities fraud and compliance. Ms. Kramer is also the author of “Ahead of the Curve” (Simon & Schuster 2007) and “The Little Book of Big Profits from Small Stocks” (Wiley 2012).