Ways for marijuana firms to protect their stocks from short sellers

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marijuana stocks, Ways for marijuana firms to protect their stocks from short sellers

(This is an abridged version of a story that appears in the April issue of Marijuana Business Magazine.)

Short sellers are betting heavily against the rapidly growing marijuana sector, especially the stocks of major players in the Canadian cannabis industry. Consider:

  • Shares of Aphria fell more than 25% on one December day because of a critical report from Quintessential Capital Management and Hindenburg Research. The two short sellers claimed the Ontario company is controlled by insiders raiding company coffers to line their own pockets. Such charges, Aphria responded, are “malicious.”
  • Shares of Cronos Group dropped nearly 30% last August after short seller Andrew Left’s Citron Research issued a report it alleges was a “reality check” for the Ontario firm.

Those companies’ experiences with short sellers – Cronos’ stock has more than recovered, while Aphria’s shares remain under pressure – have put the cannabis industry on high alert about short sales, where short sellers sell a stock that has been borrowed.

The short seller later profits from the transaction by buying back the stock at a lower price and pocketing the difference.

In effect, the short seller is gambling that the borrowed stock will fall after it’s been sold, so it can be scooped back up at a bargain.

Curious how cannabis companies can fend off short sellers, Marijuana Business Magazine spoke with Scott Greiper of Viridian Capital Advisors and Martin Landry of GMP Securities.

Though Landry warned that there’s “no secret sauce to prevent a company from being the target of short sellers,” there are ways.

For example, Landry and Greiper believe:

  • Shares of publicly traded cannabis companies are natural prey for short sellers.
  • Companies must be transparent with investors and the general public.
  • Keeping your financial house in order is key.
  • Businesses must get ahead of bad news.

Click here to read more about combating short sellers.