Cannabis stocks had quite an interesting and exciting 2018. As regulations changed around the world, it became easier for businesses in the sector to grow whether it be through merger, takeover or simply by expansion. For Altria (MO), the American tobacco corporation, it was a $1.8 billion investment in Cronos Group (CRON), which is a medical marijuana company. For Anheiser-Busch Inbev drink company, it was partnering with Tilray (TLRY) for research purposes. For Aphria (APHA), the Canadian cannabis company, it was buying up farm and office space in Latin American countries. Many cannabis stocks were shorted and Aphria wasn’t protected from it. After a short report came out providing photographic and documentative evidence showing Aphria leadership had not been honest with investors in order to benefit insiders, the company also received a hostile bid from Green Growth Brands, with an offer of $2.1 billion.
The top ten shorted stocks in the cannabis industry include Canopy Growth (CGC), Aurora Cannabis (ACB), Tilray (TLRY), Cronos Group, Aphria, GW Pharma, HEXO (HYYDF), Organigram (OGRMF), Neptune Wellness (NEPT) and Green Org Dutch (TGODF). Collectively, these ten make up for 95% of all cannabis stock shortages.
While many companies were affected, short interest fell by 17% or $505 million in December, according to research report published by research firm S3. The report implies a decline in the short exposure was not due to cannabis short sellers changing their tune, but rather an overall market downturn, which affected the prices of the stocks.
The firm’s research suggests the shorting will continue on into the new year: “If M & A activity continues in the Cannabis Sector we may see increased short covering boosting stock price performance. If stocks continue their recent upward trend, shorts may look to cover some of their exposure and realize their profits before they disappear in a puff of smoke. The U.S. market will be the primary reason for growth in the sector, increased Cannabis legalization in the U.S. coupled with increased hemp production and sales will make the existing cannabis related companies even more attractive takeover targets. Cannabis short sellers will be exposed to sudden and outsized price moves due to M & A activity, which may dampen future short sale activity, but for now shorts are partying into the new year.”
Aphria, as mentioned before, has been involved in what could be considered a soap opera — if Wall Street had one. This company received both an increase in short interest and shares. On December 1st, the company’s short interest increased from $131 million to $222 million by the end of the month. Short exposure increased by 32% and shares shorted shot up by 72%. Interest in shorting this stock in particular tripled since the beginning of November.
Regardless of the drama, shorting and hostility, Wall Street is putting trust into the Canadian cannabis firm. Aphria, considered a “Moderate Buy” according to 11 analysts, has a consensus price target of $7, which shows a potential 26% upside. 9 analysts are bullish about Aphria’s future while 1 is sidelined and 1 is bearish. (See APHA’s price targets and analyst ratings on TipRanks)