Cannabis stocks dropped Thursday after famed short-seller Andrew Left’s Citron Research published a “reality check” for Canada-based weed company Cronos Group Inc. and the rest of the sector and a new report detailed a federal effort to fight marijuana legalization.
Cronos CRON, -28.41% stock fell roughly 29% in Thursday trading, as Canada-based rivals Tilray Inc. TLRY, -4.93% slid 6.4%, and Canopy Growth Corp. CGC, -4.14% fell 3.8%. The S&P 500 index SPX, -0.44% was down 0.1% Thursday.
Weed stocks have rampaged in recent days — described by one investor as similar to a bitcoin BTCUSD, +0.22% surge — after a flurry of news related to beverage-company interest in weed: After Corona-maker Constellation Brands Inc. STZ, -0.23% announced a $4 billion investment in Canopy, a report said that Smirnoff-maker Diageo PLC DEO, -0.67% was eyeing a similar investment or partnership in three other Canadian pot firms.
Citron’s note cast a dark shadow over recent gains by Cronos, warning investors that while the end of prohibition in Canada is real, when the market shakes out, the 100-plus licensed producers will not all end up on top. Citron says investors should be especially wary of Cronos because it isn’t disclosing the size of its agreements with the various Canadian provinces, unlike other major firms in the space. Several Canadian provinces have announced their supplier lists ahead of adult recreational legalization in that country taking effect Oct. 17.
When asked whether Citron owned positions in Tilray or Canopy, Citron said it was shorting Cronos.
According to Ihor Dusaniwsky managing director of predictive analytics at S3 Partners, short interest in Canopy is 8.3% of the float, and Cronos is 12% of the float; Tilray is thinly traded and the lock-up period has not yet expired so short interest is very low. In Canadian markets the short interest in Canopy and Cronos is 2.6% and 3.8% of the float, respectively.
But for short sellers holding Canopy and Cronos, the recent run-ups in the share prices have gotten “crushed,” said Dusaniwsky in a phone interview. “The shorts are coming off just a little now, but nobody is running for the woods,” he said. “These guys got smacked around and they’re waiting for a reversal.”
Beyond short interest, Cronos has had issues with contaminated products and, Citron says, international sales represent about 6% of the top line — though it’s worth pointing out that on Tilray’s earnings call Tuesday, Chief Financial Officer Mark Castaneda said that about 5% of Tilray’s sales came from outside of Canada. Citron also said Cronos doesn’t spend capital on research and development.
Cronos declined to comment, pointing to sell-side research that speaks to the company’s strength.
Citron’s Thursday call came a day after a BuzzFeed story described how President Donald Trump’s administration has secretly amassed a committee of federal agencies — including the Drug Enforcement Administration, and the departments of Defense, Education, Transportation, Justice and Homeland Security — that the White House will use to combat public support for weed and negatively portray state initiatives relating to legalizing the drug.