Canadian marijuana stocks continue to heat up as the country approaches national legalization this July. The country’s top four marijuana producers valued over $10 billion ($7.8 billion) after this year, Canopy Growth Crop. (TWMJF) more than doubled, Aurora Cannabis Inc. (ACBFF) more than tripled, Aphria (APHQF) gained over 180 percent and lastly, MedReleaf Corp. (MEDFF) gained over 60 percent.
Investors are being drawn to this industry that has been forecast to reach C$6 billion in recreational marijuana sales by 2021. Although some analysts, remain skeptical about demand forecasts. An investor willing to place bets on that risk can ultimately lower the value of the stock and would be left paying the price. The annual interest rate for short Aurora, Aphria or MedReleaf is higher than 20 percent.
Most Canadian marijuana stocks are either small or microcap companies who don’t have margin accounts for short trades and that is a problem, according to Ihor Dusaniwsky, head of predictive analytics at a firm in New York. A higher loan fee signifies there is not much stock left to short, and investors that have a taken short position have lost money, he added.
Short-selling is when an investor sells stocks that were borrowed when the prices were elevated, with the intent of purchasing them later at the lowered price and return the shares to the lender. A profit is made from the price difference excluding the borrowing cost.
The cost to borrow shares from Aurora for a short position is 26 percent annually, versus the less than 0.5 percent for most of the stocks in the S&P 500 index, such as Apple and Amazon.com Inc., Dusaniwsky said. “The higher the fee means there’s almost no stock left to short,” Dusaniwsky said in an interview, adding, “No one is making money shorting these stocks”.
The short position in Canopy Growth currently has an estimated value over $69 million, down 26 percent from the previous month. The short interest in Aurora dropped 18 percent to $140 million, according to data. So far this year, short sellers have lost about $112 million in Aurora and $33 million in Canopy Growth, said Dusaniwsky.
“If you don’t have short sellers in the market, you have no ability for anyone to bet against a company plus you have no ability to hedge,” Damas said. “It directly feeds into the massively euphoric bull market we’ve had in these stocks.”
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