A marijuana growth facility in Maryland. Photo: Michael Robinson Chavez/The Washington Post/Getty Images

Marijuana stocks have fallen hard in 2019 and short sellers have been increasing their positions, betting the sector is overvalued and primed for further losses. Despite the passage of the SAFE Act through the House last week, Wall Street remains bearish on companies dealing in the drug.

The latest: Bank of America Merrill Lynch analysts Christopher Carey and Lisa Lewandowski downgraded Canada's Canopy Growth, the world's largest marijuana company, to neutral from buy, saying Wall Street expectations are "far too high."

What they're saying: While Carey and Lewandowski said they still see future growth ahead for both the company and the Canadian cannabis market, it's not enough to justify significant further price gains, they wrote in a note to clients.

  • "Canada industry growth is set to pause in the second half, potentially flattening, a trend we think could also be the case with Canopy; and yet the Street is modeling strong double-digit sales growth quarter-on-quarter."
  • They expect the slowdown in near-term industry growth in part because of the negative impact of vaping legislation.

Why it matters to the market: The tide looks to have turned on pot stocks this year, with 2 major ETFs that track the marijuana industry — the Horizons Marijuana Life Sciences ETF and ETFMG Alternative Harvest — losing about half their value since October 2018.

  • Cannabis short sellers, who had gotten smoked betting against the industry in 2018, are seeing their luck change, with the top 20 shorts in the sector up $336 million in the second quarter and $1.76 billion in Q3, data from S3 Partners shows.
  • Since the BAML note was published on Friday, short sellers have seen more than $200 million in mark-to-market profits, according to S3's data.

Go deeper: The future of cannabis is mainstream retail

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