Cannabis equities remain favored destinations for short-sellers, but that leaves open the possibility of a short-covering rally that could lift those stocks and ETFs such as the Global X Cannabis ETF (NASDAQ: POTX).
POTX, the first cannabis fund from Global X follows a benchmark that holds “companies involved in the legal production, growth, and distribution of cannabis and industrial hemp, as well as those involved in providing financial services to the cannabis industry, pharmaceutical applications of cannabis, cannabidiol (i.e., CBD), or other related uses including but not limited to extracts, derivatives or synthetic versions,” according to Global X.
POTX and other marijuana ETFs have been struggling to this point in 2020, but last week, the Global X fund gained about 3%.
“Short interest of the 240 stocks in our cannabis portfolio increased by $205 million, or +5%, in 2020 as short sellers were active in the sector despite incurring year-to-date mark-to-market losses,” according to S3 Partners. “Total short interest in our portfolio is $4.28 billion. Short selling in the sector remains very consolidated with the 20 most shorted stocks making up 83%, or $3.53 billion, of the total short interest in the sector and only six stocks with short interest over $100 million.”
Inside POTX Holdings
Canopy Growth (NYSE: CGC) is the third-largest holding in POTX at 8.18% of the ETF’s weight. GW Pharma (NASDAQ: GWPH) and Cronos Group (NASDAQ: CRON) combine for almost 18% of the fund’s weight and are also among the most shorted cannabis stocks.
Data from S3 confirm that short interest in the most heavily shorted cannabis names, including plenty of POTX holdings is actually on the rise.
“Shares shorted in the top 20 shorts in the sector increased by 47 million shares in 2020, worth an additional $201 million of short interest,” according to the research firm. “But in February, while short sellers sold a net 24 million shares, short interest decreased by -$7 million as shorts bought to cover shares with higher stock prices than they sold short.”
The legalized cannabis industry is also a nascent business with huge opportunities. New Frontier Data estimated that the consumer market value was nearly $344 billion in 2018, with Asia making up over half of that. There were also 263 million cannabis users globally over the past year. Interestingly, cannabis shorts have given back some 2019 gains this year.
“Short selling in the sector was a profitable trade in 2019, with the top 20 most shorted stock’s up just over $1 billion in mark-to-market profits,” notes S3. “In 2020, cannabis short sellers have given back some of their 2020 profits and are down -$289 million in mark-to-market losses for the year.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.