Short selling has gained renewed steam in 2021 as online traders join forces, but the cannabis industry has had its fair share of dealings with short sellers in the past.
Taking a bearish posture on particular names in the cannabis space is a viable and at times very profitable way to play the odds in the emerging sector.
With targeted short selling now seeing traction once again, the Investing News Network offers a look back at several instances of short selling attacks in the cannabis industry.
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Short selling can be profitable, but potentially dangerous
Short selling is an investment tactic in which an investor borrows shares of a company from a broker with the expectation that they will decline in value. In a successful short sale, the investor will sell the borrowed shares, then buy them back at a lower price before they must be returned.
According to a report from S3 Partners, a research firm dedicated to evaluating short selling moves, cannabis short selling netted almost US$1 billion in 2019.
S3 Partners’ analysis shows that shorting Aurora Cannabis (NASDAQ:ACB,TSX:ACB), Cronos Group (NASDAQ:CRON,TSX:CRON) and Tilray (NASDAQ:TLRY) proved to be the most effective moves that year. The spate of short selling in 2019 was driven by lackluster results from these companies contrasted with the level of valuation placed on the entire cannabis sector.
During a cannabis conference in early 2019, one analyst suggested that the reason cannabis stocks had attracted short sellers was due to the high level of attention the industry was receiving overall.
Neal Gilmer, an analyst with Haywood Securities, said the increasing speed at which cannabis companies were reaching considerable valuations had most likely intrigued short sellers.
Of course, while shorting cannabis stocks can be beneficial, there is a substantial amount of risk in using this strategy. As Investopedia explains, it leaves investors open to “unlimited losses”:
If you short a stock at $50, the most you could ever make on the transaction is $50. But if the stock goes up to $100, you’ll have to pay $100 to close out the position. There’s no limit on how much money you could lose on a short sale. Should the price rise to $1,000, you’d have to pay $1,000 to close out a $50 investment position. This imbalance helps to explain why short selling isn’t more popular than it is. Wise investors are aware of this possibility.
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