If you are impressed with GameStop’s (GME) meteoric 2,300% gain in a little over two weeks then you need to know about a similar trade that is currently setting up in the cannabis sector.
I am going to reveal two of the most shorted cannabis stocks and explain why a GameStop-style, short squeeze could send shares soaring.
The cannabis sector has long been a favorite target of short sellers. In 2019, and the first half of 2020, this was a very profitable strategy. If anyone wants to learn more about a short squeeze, here is an explanation and example from Investopedia.
According to data from S3 Partners, traders shorting cannabis stocks made $1 billion in 2019. The party raged on for a good part of 2020. In August, cannabis sector short sellers were up another $402 million on the year.
However, while shorting cannabis stocks paid handsomely in 2019 and early 2020, the times are changing in the cannabis sector. It has become a dangerous time to short cannabis stocks.
Most-Shorted Cannabis Stocks
There are two heavily shorted cannabis stocks on the New York Stock Exchange and the NASDAQ right now.
The short interest in both of these stocks is dangerously high (similar to the setup in GameStop) and a short squeeze could send both soaring.
This is a chart of the most shorted cannabis stocks on the New York Stock Exchange and the NASDAQ. The exact financial metric is Percent of Shares Outstanding Short.
As you can see, shares shorted in most cannabis stocks have fallen in the last few months. But what you’ll also notice is that two cannabis stocks stand out with a noticeably higher percentage of shares being shorted – Tilray and Aurora.
Tilray, Inc. (NASDAQ: TLRY)
Tilray is one of the largest Canadian cannabis companies, an early industry leader, and has a market cap of $4.2 billion. This stock has three key traits that make it a great target for a short squeeze.
#1 – Market Cap
Tilray’s market cap of $4.2 billion is still relatively small on Wall Street. Smaller market cap stocks are easier for hedge funds and decentralized groups of individual investors to push up and down.
#2 – Shares Are Down
In the last two years, short sellers have punished Tilray. Despite a recent rebound, Tilray shares are still down more than 80% from the all-time high.
#3 – Increase in Shorted Shares
The number of shares being shorted has risen sharply in the last two months. Tilray is currently the most shorted cannabis stock on the NASDAQ. This good for a potential short squeeze – more shares being shorted makes it easier to trigger a short squeeze.
Below is a 2-year chart for Tilray. The top chart is Tilray’s share price and the bottom chart is the number of shortened shares. This is the ideal setup for a big short squeeze.
Aurora Cannabis (NYSE: ACB)
Aurora is also one of the largest Canadian cannabis companies and has a market cap of $2.7 billion. Similar to Tilray, Aurora is also a heavily-shorted stock on the NYSE. And also similar to Tilray, Aurora has key traits that make it a great target for a short squeeze.
Aurora’s share price has also been crushed in the last two years, down more than 90% from the all-time high back in 2019.
In the meantime, the number of shares being shorted has risen sharply in the last year, recently hitting a new 52-week high before pulling back a bit. Below is a 2-year chart of Aurora Cannabis Inc.
The Big Picture on Cannabis Stocks and a Potential Short Squeeze
Wallstreetbets, Reddit’s largest trading group with more than 10 million members, just triggered an epic short squeeze in GameStop. This squeeze moved shares to jump more than 2,300% in just over two weeks. Today, millions of investors want to know – what is the next target?
While cannabis investors should remain cautious, Tilray and Aurora both look like ideal targets for a short squeeze. Both of these stocks have the three key traits needed to trigger another epic short squeeze.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.