Shares of Aurora Cannabis (ACB) have been on a downward spiral of late but the shareholders’ pain may not be over yet. Latest data reveals that short interest in the scrip surged to record levels in the last reporting cycle, ahead of its Q2 earnings. This essentially means that a broad swath of market participants is piling short positions and forecasting that its shares will plummet further in the coming weeks and months. This should come across as a concerning sign for Aurora’s investors, as it indicates that the ongoing downtrend in its shares could continue further. Let’s take a closer look.
(Image source, Image labeled for reuse)
Surge in Shorting
Let me start by saying that short interest is basically just the total number of short positions that are open and are yet to be covered. A sharp rise in the metric indicates that market participants are actively initiating short positions against a company, thereby growing bearish on the name. Conversely, a sharp decline in the metric highlights an active short unwinding, probably because the market is growing bullish on the concerned company. So, short interest highlights the general market sentiment for any given scrip.
As far as Aurora Cannabis is concerned, its short interest spiked to 178.8 million shares in the last cycle – a record high for the company. Had it been a minor fluctuation, we would have just called it an anomaly and assumed it was business as usual. However, as things stand, its short interest figure is up by about 100% on a year on year basis and up 4% sequentially. So, it’s definitely not a normal scenario.
Data byNow, Aurora’s shares outstanding count has risen over the last year. So a proportional rise in its short interest figure would’ve kept its overall shorting activity (shorts as a percent of outstanding shares) basically at the same levels. But the concerning bit here is that over the last year, Aurora’s shares outstanding have risen by about 15% in number while its short interest has more than doubled. This suggests that this buildup in its short interest is majorly due to the Street growing bearish on the name.
I looked at shorting activity in some other Cannabis companies, to put things in perspective. The data presents a good and a bad scenario.
(Chart compiled by author, data from Shortsqueeze)
Aurora Cannabis clearly isn’t as heavily shorted as some of its highlighted peers. Besides, the high short interest levels indicates that a broad swath of market participants is betting against the entire Canadian cannabis sector, rather than targeting just Aurora. This must come as a respite for long-side Aurora investors who are currently in the red.
However, the data also doesn’t make the recent buildup in Aurora’s short interest any less significant on a standalone basis. One might even argue that Aurora’s short interest as a percentage of float figure still has room to grow, till it’s close to the peer average. So, depending on how one looks at the data, there’s a good and a bad side to it. But this begs the question – why are market participants shorting Aurora in the first place?
There’s a Good Reason For It
For starters, Aurora Cannabis posted a sequential decline in overall revenues during its Q1. Its management also slashed their capacity expansion plans in light of lower than forecasted sales and acknowledged during their last earnings call that retail-side bottlenecks are limiting its growth.
(Source: Business Quant)
There have been a couple of developments since then.
First, latest data reveals that cannabis retail store sales in Canada rose sequentially by a marginal amount during October and November. This essentially suggests that Canadian retail market is improving, and also that retail-side bottlenecks are gradually being eased out. However, at the same time, the pace of growth doesn’t seem rapid enough to act as a tailwind for most industry incumbents, Aurora included.
(Source: Business Quant)
Aurora’s Q2 spans from September through December. This means that soft industry numbers, for the said period, are likely going to dampen the cannabis producer’s upcoming Q2 results. This argument, of course, won’t be valid if Aurora’s management somehow managed to win retail-side market share during the period. But that may be a big IF.
Secondly, Aurora Cannabis reportedly put one of its largest production facilities up for sale last month. This unexpected development casts various doubts on its operational and financial positioning, such as:
- Why is Aurora Management forced to opt for an asset sale? Are they not seeing any material demand growth in the coming quarters?
- What was the projected return on investment from this facility? Was it really that low, and maybe below industry averages, to trigger a divestment?
- Is Aurora Cannabis facing a severe crunch that its management had to sell an asset to fund its working capital? If so, then what got Aurora Cannabis into this bleak financial position anyway?
- Aurora’s management already announced a capex cut in the last quarter. Then what was the need to put one of its assets up for sale, just months after the capex cut was announced?
Maybe the management is lacking conviction in their once-hyped growth story, or maybe they’re seeing that the consumption story isn’t strong enough or maybe the retail-side bottlenecks will take a long time to ease out. Whatever the case maybe, things, as they stand, don’t look too encouraging for Aurora’s long-side investors. In light of this heightened uncertainty around Aurora’s future, it’s no wonder why short interest in the scrip surged in the last reporting cycle.
Investors Takeaway
Readers and investors should note that a rising short interest figure doesn’t always push down the price of the concerned security. But the buildup of short interest in Aurora Cannabis highlights the direction of big money flows and shows how market participants are growing increasingly bearish on the name.
The thesis here is that if a broad swath of market participants perceived Aurora Cannabis to be undervalued and a great contrarian buy, then we would have seen its short interest decline. But that scenario clearly did not play out for Aurora Cannabis and its shareholders, and the metric actually rose.
This essentially goes to indicate that there are fewer reasons to go long on Aurora Cannabis at this stage. Therefore I recommend that long-side investors reassess their thesis and wait for the stock to fall a bit more before initiating any new long positions. That stock may fall further. Good Luck!
Author’s Note: I’ll be writing another article on Aurora Cannabis next week, you can stay updated by clicking the “Follow” button at the top. Thanks!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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