Short sellers circle cannabis stocks as profits dwindle

© Reuters. Short sellers circle cannabis stocks as profits dwindle

By David Randall

NEW YORK (Reuters) - Wall Street's love of cannabis appears to be going up in smoke as vaping-related ailments and missed revenue projections are prompting short sellers to raise their bets against the industry, fund managers and analysts said on Wednesday.

Short interest in cannabis stocks, which reflects bets that prices will fall, has risen 55% for the year to date, handing short-focused investors more than $2 billion in profits over the period, according to data released by research firm S3 Partners on Monday.

More than 800 cases of a vaping-related lung disease and 12 deaths across 10 U.S. states have so far been reported by the U.S. Centers for Disease Control and Prevention, leading states such as Massachusetts to impose temporary bans on all vaping products. Those numbers are expected to climb.

A pushback on vaping could put further pressure on companies such as Curaleaf Holdings Inc (CD:CURA) and Aurora Cannabis Inc (TO:ACB), whose stocks suffered drops of 10% or more after missing revenue projections in their most recent quarters.

Fund managers say increased short selling is a sign that the industry is transitioning from a can't-lose proposition to a shakeout that will leave only the highest-quality companies standing.

"We've been through the golden ages in the sector where you had high growth models and unsustainable price speculation because it was a hot new idea," said Michael Underhill, chief investment officer at Capital Innovations, who has focused on cannabis stocks. "Now the gold rush talk is gone and you're going to see a rationalization of the business."

As a result, Underhill is focusing more on companies like iAnthus Capital Holdings Inc (CD:IAN), which recently hired senior executives from Coca-Cola Co (N:KO), Nike Inc (N:NKE) and Hewlett-Packard, and is focused more on managing its balance sheet for long-term growth than expanding at any cost, he said. Shares of the company are down 65% for the year to date.

"This is going to start being a story of haves and have-nots very soon," he said.

Short-selling will likely continue to weigh on share prices until legislation allows more giant fund companies such as Fidelity Investments Inc and T. Rowe Price (O:TROW) to take larger positions in cannabis companies, said Brett Hundley, an analyst at Seaport Global.

"It's going to be a while before big institutional investors can access the cannabis space and that takes away the incremental buyer that could push stock values up," he said.

That lack of support from capital markets will also weigh on companies trying to expand in newly opened markets such as Illinois and Massachusetts, making it harder for those with weak balance sheets to survive, he said.

Yet some fund managers maintain that the short-selling is already overdone, with the possible health benefits of cannabis boosting its long-term appeal.

"There's a little bit of a feeding frenzy happening right now and everything good is getting thrown out along with the bad," said Dan Ahrens, portfolio manager of the actively managed AdvisorShares Pure Cannabis ETF (P:YOLO).