In case you didn't notice, the "Green Rush" is definitely upon us. With California ready to legalize pot in just a few days, and Canada officials working meticulously towards the same direction, investing in the cannabis stock market seems like a sensible idea. After all, we've seen people get rich in just a few days during the DotCom boom or the Real Estate boom. However, some people want to make money by betting in the collapse of the cannabis stock market.
But just how sustainable is betting against the growing cannabis market right now?
Marijuana is currently on the rise in Canada, raising the value of the marijuana trade via speculation. However, as stock prices increase, so does the suspicion of yet another bubble. As Canada's legalization framework is getting finalized before it is set in motion in July, there is a lot of activity regarding marijuana stocks.
Big players of the Canadian marijuana market are now collectively worth more than CA$10B: Canopy Growth Corp., the first marijuana company to enter the stock market doubled its net worth this year, while Aurora Cannabis Inc. more than tripled. Aphria increased more than 150% in value, and MedReleaf Corp. has climbed more than 60% since it started in June.
Investors are optimistic about the market's future, as some rough estimates suggest that recreational marijuana sales in Canada could surpass CA$6B by 2021. However, as Canadian provinces are still ironing out the details, some analysts remain cautious. And their skepticism is well-founded: Some of these companies have yet to make a single sale. Investing in them could very well end up in a big flop.
Some investors are willing to bet against the trend, but short-selling stocks appears to be much pricier than they expect. The annual interest rate to short Aurora, Aphria or MedReleaf is upward of 20%, said Chris Damas, editor of the BCMI Cannabis Report.
Short-Selling Marijuana Stocks
Short selling means that investors sell stocks they borrowed while the price was high. When the stock price eventually falls, the investor buys it back and returns it to the owner from which it was originally borrowed. By doing so, a person makes money when the stock loses value. Essentially, it is like betting that the market will collapse.
"The problem is most of the Canadian marijuana stocks are small to microcap companies held by small retail investors who don’t have margin accounts for short trades", said Ihor Dusaniwsky, head of predictive analytics at S3 Partners in New York in a telephone interview with Bloomberg. "The higher loan fee means there’s almost no stock left to short, and some investors who have taken short positions in the market have lost money", he added. "The annual cost to borrow Aurora shares for a short position is 26 percent, compared with less than 0.5 percent for most stocks in the S&P 500 index, such as Apple and Amazon.com Inc.", Dusaniwsky said.
Dusaniwsky further added that the short position in Canopy Growth currently has a notional value of more than $69 million, down 26 percent from a month ago, while the short interest in Aurora Cannabis declined 18% to $140 million, according to S3 Partners data. "This year to date, short sellers have lost $112 million in Aurora and $33 million in Canopy Growth", Dusaniwsky said.
Betting Against The Marijuana Boom
Canada's latest provincial distribution plans and Aphria's deal with a national pharmacy chain bring more stability to the investment market. However, like many seemingly "booming" markets before it, the marijuana bubble could very well burst. Reports of oversupply are coming in and the critics might just as well see their fears (or hopes) confirmed. Currently, however, there is nothing in sight to stop the rapid increase of the marijuana stock market.