It’s been a great year for cannabis stock investors, but cannabis short sellers are getting burned.

Not only are short sellers enduring heavy paper losses as cannabis share prices surge higher, a new report by financial technology and analytics firm S3 Partners suggests the fees to maintain open short positions are on the rise.

Tilray’s Big Move

The share price of Canadian cannabis grower Tilray (TLRY) has more than tripled since the company went public on the US market back in July of 2018. Along the way, Tilray secured high-profile partnership deals with pharmaceutical giant Novartis (NVS) and alcoholic beverage leader Anheuser Busch Inbev (BUD). Tilray doubled its cannabis production capacity when it acquired a 662,000 square foot greenhouse from Natura Naturals Holdings in January. But short sellers argue Tilray’s $6.2 billion valuation is not reflective of the company’s relatively modest business. Tilray has estimates potential peak annual production of just 75,000 kg to 80,000 kg of cannabis.

Short sellers saw an opportunity in Tilray and have piled into the stock in the past year. According to S3 Partners, short sellers are currently betting an aggregate of $265 million against the stock. Tilray shares have cooled in recent months, making it one of the least painful cannabis short bets of 2019. However, the fees required for short sellers to maintain their Tilray short bets are getting extremely high. Tilray short sellers are paying an average stock borrow fee of 24.4 percent just to maintain their outstanding positions, according to S3 Partners analyst Ihor Dusaniwsky. Dusaniwsky says short sellers making new bets against Tilray are paying fees of more than 45 percent of the size of their positions.

No Shares To Borrow

But Tilray short sellers are facing another problem as well. To open a short position in a stock, short sellers must first find shares that are available to borrow. A whopping 19.5 percent of all free-floating Tilray shares already being held short. At this point, Dusaniwsky says short sellers simply can’t find shares left to borrow.

“There is virtually no stock loan inventory left, forcing stock loan rate to climb every time a sliver of stock borrow becomes available. With stock loan trades occurring at irregular intervals and sizes, stock borrow rates have varied dramatically, with lenders charging whatever the borrower can bear,” Dusaniwsky says.

Heavy Losses

Tilray stock is down 0.7 percent year-to-date, potentially good news for short sellers. But borrow fees have generated an estimated $33 million in net paper losses for Tilray short sellers this year. Other cannabis stock short sellers have not been so lucky. Canopy Growth Corp (CGC) stock is up 71.2 percent in 2019. Short sellers have taken a $690 million loss on the stock. Aurora Cannabis (ACB) stock is up 60.2 percent year-to-date, and short sellers are down $397 million.

(Outstanding short positions in cannabis stocks. Source: S3 Partners.)

All together, Dusaniwsky estimates short sellers betting against the 10 most popular cannabis stocks have endured total losses of more than $1.77 billion in the first two and a half months of 2019.

As for Tilray short sellers, Dusaniwsky says rising fees and lack of available shares could soon start forcing short sellers to exit their positions.