Feb 28, 2019 - Economy

The looming marijuana short squeeze

Data: S3 Partners; Chart: Chris Canipe/Axios

The marijuana industry has quietly been having a very strong 2019, and it could push even higher.

The big picture: The nascent industry has drawn an outsized share of short sellers who are betting the stocks will fall in value. Short sellers, by and large, say they are not bearish on the business, but believe the companies' valuations are wildly high, making them good short bets.

  • Tuesday's reefer rally, however, has put short sellers in a position where they'll need to double down or bow out of their positions.
  • Canadian marijuana company Aphria announced a deal to produce and sell medical cannabis patches developed by scientists at MIT, and Aurora Cannabis announced an expansion into Portugal.

Details: Shorts had been up $21 million in mark-to-market profits, but headlines Tuesday of new breakthroughs poised to boost the industry pummeled them with $213 million of mark-to-market losses. They are now down $192 million for the month and $1.78 billion for the year, according to S3 Partners managing director of Predictive Analytics Ihor Dusaniwsky.

  • The ETFMG Alternative Harvest ETF has risen 47.5% year-to-date and the Horizons Marijuana Life Sciences ETF is up 51.5% on the year.
  • "If losses for cannabis short sellers continue to mount, we should see continued short covering and added upward price pressure boosting the profits of a growing community of long shareholders," said Dusaniwsky.

The bottom line: Short sellers borrow stock with the intention of buying it later at a lower price and pocketing the difference. But with an average stock borrowing fee of 15% and mounting gains in the cannabis sector, it's getting very expensive to hold onto short positions.

Go deeper: Sin industries like marijuana and sports betting could shine in 2019

Go deeper