Shares of Canadian cannabis leader Tilray Inc. (TLRY) are dipping on Tuesday, which might entice short-sellers awaiting a big correction in the stock.
Tilray's volatile nature and the disconnect found in its nearly $11 billion market cap in relation to less than $10 million in sales in the second quarter has kept shorts steady. The pessimistic onlookers are awaiting a price drop even after a September surge that famously squeezed so many shorts.
Maybe the most famous short-seller among the bunch is Citron Research's Andrew Left, who has called British Columbia-based Tilray's intermittent surges in recent months "retail investors gone mad."
Left said he remains confident in his position at the Reuters Global Investment 2019 Outlook Summit in New York on Monday, noting that the potential for U.S. legalization that is bolstering confidence could actually be a death knell.
"When U.S. LPs go public in the next few years it will make these Canadian companies laughable," he said. "The cannabis trade is a perfect trade because the cannabis trade is a non-branded, no-moat mega-trend."
S3 Partners, a short interest analytics firm, noted that Left is far from alone in his criticism of Tilray and cannabis stocks more generally.
"With the cannabis sector rallying in 2018, short-sellers have added almost $1.4 billion of exposure since mid-year, hoping for a reversal in what they believe to be an over-heated and over-valued sector," managing director Ihor Dusaniwsky wrote in a report on Nov. 8. "Short interest is now $3.35 billion in the 141 securities we track in our cannabis basket."
He noted that over 90% of this short interest is concentrated in just 10 securities, with much of it targeted at Tilray.
The problem for short-sellers is that the borrowing cost to continue shorting the stocks is exorbitant.
"While short-selling and timing the cannabis market may be a profitable endeavor, there is a steep cost to enter the trade," Dusaniwsky noted. "Several of the most shorted cannabis stocks have very high borrow costs with TLRY at 38% fee, Cronos (CRON) at 42% fee and Green Organic Dutchman (TGODF) at a 50% fee."
A data report shows that shorts are currently losing $1.3 million per day on stock borrow financing to keep up their bearish bets.
Canopy Growth Corp. (CGC) , Stocks Under $10 holding Aurora Cannabis (ACBFF) , Tilray, GW Pharmaceuticals (GWPRF) , and Cronos Group are currently the five most shorted stocks in the market, in that order.
January Judgment Day
Even still, the bearish bettors are not backing off and are instead anticipating a jolt downward in January.
Jan. 15 is a pivotal date for the cannabis company, as it marks the end of Tilray's post-IPO lockup period. The lifting of the restriction would allow Privateer Holdings, the company's largest shareholder, to cash out on its 76.7% stake in the company.
Any significant drop-off in the major shareholder's stake would dilute shares and likely tempering the company's rapid growth profile.
"What happens the day the lockup expires and the float doubles? What happens to the stock then?" Andrew Left said at the Reuters conference.
The options market heading into next year is following Left's lead.
Jan. 18-dated $60 puts currently command the highest open interest for next year's available options.
More immediately, the options market is pricing in heavy volatility for Tilray on its earnings Tuesday evening. The market is pricing in a 27.3% post-earnings move for the stock, according to Schaeffers Research.
Such a move could vindicate or obliterate the bevy of short-sellers following the stock.