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Short sellers circle cannabis stocks as profits dwindle

Wed 2nd October, 2019 9:11pm
By David Randall
    NEW YORK, Oct 2 (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.  urn:newsml:reuters.com:*:nL3N26L36H
    A pushback on vaping could put further pressure on companies
such as Curaleaf Holdings Inc  CURA.CD  and Aurora Cannabis Inc
 ACB.TO , 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  IAN.CD , which recently hired
senior executives from Coca-Cola Co  KO.N , Nike Inc  NKE.N  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  TROW.O  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  YOLO.P .
    
    

 (Reporting by David Randall; Editing by Richard Chang)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
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