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 | | | 15 Cannabis Stocks Under Pressure From Short Sellers | | Matthew Carr | Chief Trends Strategist | The Oxford Club | | | | | "It was the best of times, it was the worst of times..."
The opening line of Charles Dickens' Tale of Two Cities was written more than 150 years ago, but it's just as apt for cannabis investing today.
Following Canada's legalization of adult-use marijuana in October 2018, the North American Marijuana Index hit new 52-week highs... which were then followed by new lows.
It went from the best of times to the worst... But just when things seemed darkest, a new rally began.
The good times returned!
The sector springboarded off those January 2019 lows to a peak at the end of the first quarter.
Unfortunately, the celebration was short-lived. That 2019 crest has been followed by a slow, painful decline. | | | Today, much of the year's gains have been erased.
Fundamentally, there have been trials that investors have had to endure.
First and foremost, in preparation for Canadian legalization, producers had to ramp up production. In part to stave off a shortage and in part to meet demand. This led to soaring costs and mounting losses.
And in some cases, as with Canopy Growth Corp. (NYSE: CGC), the mounting losses led to executives getting the ax.
The shortage also limited the amount companies could sell. Plus, as we know from previously legalized markets, when adult-use is given the green light, the vast majority of initial sales are dried flower - the lowest-margin product.
That adds even more pressure to balance sheets.
Now, as investors soured on the short-term snapshot of the industry, another event has come into play - a rise in short interest.
So this week my team and I looked at which cannabis stocks are suffering the most pressure from short sellers.
The result was a mixed bag of highfliers and underperformers... Tilray (Nasdaq: TLRY) tops the list with nearly 30% of its float short.
Year to date, shares of Tilray have stunk, declining nearly 40%. They're down a whopping 85.5% from their $300 high on September 19.
Getting quickly overpriced and having to rely on third-party supply to meet demand has provided plenty of red meat for short sellers to feast on.
But for Innovative Industrial Properties (NYSE: IIPR), the 2019 story is quite the opposite.
Its shares have been one of the top performers in the sector, gaining more than 171% so far. Over the past year, the real estate investment trust has served as a safe haven for pot stock devotees. It's the only pure cannabis play that pays a dividend and has outperformed when the broader sector has declined.
Also, its float is currently less than 10 million shares.
Cronos Group (Nasdaq: CRON), like Tilray, was another big winner in 2018. But unlike its fellow Canadian producer, Cronos' shares have tacked on more gains this year. It's one of the bellwethers of the industry, so I'd expect short interest there.
And then we have Zynerba Pharmaceuticals (Nasdaq: ZYNE), which is another 2019 highflier. Shares have gained more than 260% year to date.
We also see GW Pharmaceuticals (Nasdaq: GWPH) just outside the top five heaviest-shorted cannabis plays.
In all, we see that Canada's "Big 7" - Aphria (NYSE: APHA), Aurora Cannabis (NYSE: ACB), Canopy, CannTrust Holdings (NYSE: CTST), Cronos, Hexo Corp. (NYSE: HEXO) and Tilray - all made the top 15 list.
American pot stocks cbdMD (NYSE: YCBD), Innovative Industrial, KushCo Holdings (OTC: KSHB) and MedMen Enterprises (OTC: MMNFF) are also on the list.
Then come the two big pot stock biotechs, Zynerba and GW Pharma, as well as 2019 outperformers Neptune Wellness Solutions (Nasdaq: NEPT) and India Globalization Capital (NYSE: IGC).
Let me point out that all of these - save for KushCo and MedMen - trade on major U.S. exchanges. That makes it easier for a wider range of investors to go short.
Now, outside of the top four, the current level of short interest isn't too unnerving. And if Tilray and Innovative Industrial can score more positive headlines, we can have a little bit of a squeeze. Much like the rally Neptune Wellness has seen in recent days on its positive financing news.
In coming weeks, we'll also try to look at Canada's naked short interest levels.
For mainstream U.S. investors, this is a subject they never have to face. But with so many American pot stocks doing either reverse takeovers or initial public offerings on Canadian exchanges, it's something investors should get acquainted with.
It's been a roller-coaster year for cannabis. And as I always say, time passes differently in the sector. A week in pot stocks is akin to a month elsewhere.
In 2019, we've lived that. We went from the best of times - outperforming the broader markets and up 40% - to the worst... with those gains completely erased.
But we're looking for bright days ahead... and a couple of short squeezes wouldn't hurt.
Here's to high returns,
Matthew | | | | |  | | | | | |  |  | | | | Matthew Carr | July 22, 2019 Curaleaf announced its acquisition of GR Companies, making it one of the largest cannabis companies in the world. Read More | | | | |  | | | | Anthony Summers | July 20, 2019 Wind power is the fastest-growing source of renewable energy. Here's how to play it in 2019. Read More | | | | |  | | | | Matthew Carr | July 18, 2019 Westleaf Chief Commercial Officer Adam Coates joins us to explain what makes the company's Prairie Records dispensaries so different from anything else in the Canadian cannabis industry. Read More | | | | | | | | | | |
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The Oxford Club is a financial publisher that does not offer any personal financial advice or advocate the purchase or sale of any security or investment for any specific individual. Members should be aware that although our track record is highly rated by an independent analysis and has been legally reviewed, investment markets have inherent risks and there can be no guarantee of future profits. The stated returns may also include option trades. 
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