In the investment world, there are not only potential profits to be had by betting on the winners, it is also possible to generate substantial gains by wagering on stocks expected to tank. This is called shorting stock or short selling—it’s a popular technique based on the ethos that there is a profit to be made somewhere between the buy and sell prices of companies doomed to spit the bed—and it has recently caused investors to suffer considerable losses and fees, according to a report from the New York Times.
Cynical investors have spent the summer trying to get the upper hand on cannabis stocks. This method may have perhaps seemed like the most logical means for capitalizing on this sector, given the majority of pot stocks are grossly overvalued—meaning their overall worth greatly exceeds their annual sales.
In fact, investors have been so hell bent on this practice that the number of shorted shares has actually increased by nearly 80 percent since the beginning of August. But in some cases, like with Canadian pot firm Aurora Cannabis, investors have been taking it on the chin because major developments, such as discussions with Coca-Cola about partnering with the company to make a CBD-infused beverage, has caused the stock to make a consistent climb.
“That rise has cost short sellers $50 million over the past six weeks,” the Times reported.
And that is just the loss connected to that one company. Short sellers have watched $626 million float down the proverbial crapper by betting against cannabis stocks, according to financial tech firm S3 Partners.
What appears to be jamming up the investment community is the fact that some of the largest beverages companies on the planet have been working under the “If you can’t beat em’, join em” philosophy, throwing billions of dollars at partnership deals with the cannabis industry. These types of business arrangements have become especially prevalent ever since Canada announced plans to launch a fully legal recreational marijuana market in October.
The country’s new law, which will only allow for the distribution and sale of raw cannabis in 2018, gives edibles and beverage makers the rest of the year to bring to life their cannabis-infused offerings. So many of these firms, including Constellation Brands and Molson Coors have been going for it. Others like Diageo Plc, makers of Crown Royal Whiskey, could follow suit.
“The industry’s skeptics haven’t given up in the face of this run-up,” the Times reports. “Over the last two weeks, short sellers have increased their bets against a number of cannabis companies, but the bets come with high costs.”
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What is happening is cannabis stocks are becoming short seller proof. In order for investors to profit from the idea that these overvalued stocks are going to plummet, they need to borrow shares from a broker, sell them in hopes of buying them back later at a lower price, and then return them back to the broker, pocketing the difference.
But there must be shares available to bet against. But with the cannabis market, there are not as many shares left to borrow.
Analysts with S3 Partners told the Times that “The $1.5 billion short bet against cannabis stocks is costing $2.4 million a day, or 200 times more than an equivalently sized bet against a basket of stocks including Apple, Amazon, IBM and Goldman Sachs.”