Marijuana Short Sellers—Should Investors Be Concerned?

marijuana stock shorting
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Marijuana Short Sellers

The marijuana industry draws a lot of passionate people—on both sides. For pot stock bulls, they swear by the massive gains seen in the industry over the past few years. For naysayers, they point to overvaluation and hype. One particular group I’d like to focus on is the marijuana short sellers.

Short sellers, of course, would go hand in hand with those who believe the industry to be overvalued. After all, if you believe a stock’s price to be dramatically inflated, then it would only make sense to short the shares.

For marijuana stocks, that has at times paid off.

The industry, after all, is known for its volatile swings in both directions. While I count myself among the long-term marijuana stock bulls, I understand the mindset behind marijuana short sellers.

The industry is in the process of rapid growth and expansion. As such, the market can at times get ahead of itself. This opens up an opportunity for both short-term day traders and longer-term players to short these overvalued companies.

According to research firm IHS Markit Ltd (NASDAQ:INFO), marijuana short sellers have increased in number by 102% since the fourth quarter of 2017 with nearly $2.0 billion in short positions. This ranks as only slightly below the all-time high on January 24, at the height of the massive marijuana correction that took place. (Source: “Short sellers fade Pot stock rally,” IHS Markit, May 22, 2018.)

And that brings us to one of the most shorted companies in the industry: Canopy Growth Corp (NYSE:CGC).

CGC stock is among the largest in the industry and formerly had the largest market cap of any marijuana stock. Naturally, this large size and high valuation put a target on the company’s back for marijuana short-sellers.

IHS Markit estimates a whopping $471.0 million worth of short positions on Canopy Growth stock. Since the beginning of the year, that represents a $143.0-million increase.

Ironically, I view this move to be itself based on hype. Or, rather, negative hype.

You see, when the correction first began, the doomsayers were quick to say “I told you so” as marijuana stocks fell dramatically across the board.

This undoubtedly prompted many to jump in on the marijuana short seller’s game.

But this move will, in my view, prove myopic.

CGC stock registered a strong performance in May, jumping by as much as 20% at one point. Not to mention that the future of the industry looks bright, with Canadian marijuana legalization on the way and a fresh NYSE listing in tow.

All in all, the future of Canopy Growth stock appears bright to me.

While there is certainly a possibility for money to be made via short selling, especially if one is willing to day trade, I think that most retail investors are more often than not better off going for the long-term plays.

The long-term play here, in my opinion, is to support CGC stock. I see the company’s massive international expansion as a precursor to strong performances for years to come. While there will be some bumps along the way, CGC stock is likely going to finish the year stronger than where it is now.

Analyst Take

It makes sense that there is an increase in marijuana short sellers, especially following the marijuana correction that took place to start the year.

But don’t be fooled; there’s still a lot of upside left in the marijuana market.

Marijuana short sellers aren’t necessarily wrong in their plays as I do foresee a number of ups and downs for the industry in the near-future.

But my long-term projection for the industry more broadly and CGC stock specifically is that they both will see gains in 2018 and potentially for years to come.