It is an open secret that the Big Cannabis stocks have attracted a lot of opportunistic negativity. The industry took off too fast and now that the mood has gotten more realistic, it will take time to recover.
I remain bullish on the long term. The right portfolio of these stocks will make high-conviction investors very happy when the business matures.
For now, however, there isn’t a lot of instant gratification here beyond the occasional surge when the short sellers cover their positions. While consolidation is happening, it’s too slow to do anything more than relieve a little pressure.
It felt great for shareholders in Aurora Cannabis Corp. (NYSE:ACB), Canopy Growth Corp. (NYSE:CGC) and Tilray Inc. (NASDAQ:TLRY) when CannTrust Holdings Inc. lost its NASDAQ listing. But the bears still control the game here.
Roughly 20% of each of those companies is currently tied up in short contracts. That’s a direct indication of the level of negativity these stocks face.
When the cannabis bears cover, they come back for another ride to the downside. Elsewhere in the market, short sellers have a reason to be a lot more cautious.
Short interest for the S&P 500 as a whole rarely increases beyond 3% of the shares available. Anything more aggressive becomes a problem when the bets go against you.
That, of course, is the infamous short squeeze, when people who need shares fast to cover expiring positions pay high prices to exit. All it takes is long-term investors refusing to hand over their stock until the clock on the short side ticks down.
I don’t see a squeeze ahead for most of Big Cannabis because these stocks are liquid enough to give the bears plenty of opportunities. These shares are circulating. All the shorts need is to wait a day or two to accumulate what they seek.
One day the bulls will draw a firm line and the bears will need to surrender. When you see these stocks rally for a few days in a row, the odds are pretty good that the shorts are getting nervous.