When looked at over a multiyear stretch, the cannabis industry has delivered plenty of big winners. If investors had bought into a handful of the most popular pot stocks at the beginning of 2016, they'd be up a quadruple-digit percentage today.

However, the past four months haven't been pretty for cannabis stocks, with some folks suggesting that the marijuana bubble has (once again) burst. Supply issues throughout Canada have constrained the amount of marijuana products hitting dispensary store shelves, while high tax rates in the U.S. have fueled the black market, leading to declining sales and bottom-line projections almost across the board.

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As a result of the poor performance of marijuana stocks in recent months, it's not a surprise to see that short interest has picked up for many. Short-sellers make money when the share price of a publicly traded company declines. With investor expectations almost always outpacing the maturation process of next-big-thing investments, pessimists believe that history is on their side when it comes to the rise of cannabis.

But what you might be surprised to learn is that three of the 12 pot stocks listed on major U.S. exchanges actually saw a decline in their short interest between mid-June and mid-July. Though the performance of cannabis stocks has been bleak, it would appear that pessimism may be waning with the following three pot stocks.

Village Farms International

The first cannabis stock to see a welcome decline in short shares held is British Columbia-based Village Farms International (NASDAQ:VFF). Between mid-June and mid-July, the number of shares held short declined from 4.29 million to 3.85 million, according to data provided by Morningstar.

The first reason for this decline could be that everything has remained on time and on budget with its joint venture cannabis operations. Village Farms and Emerald Health Therapeutics formed a joint venture known as Pure Sunfarms back in 2017. The first acquisition of the joint venture, the 1.1-million-square-foot Delta 3 facility (purchased from Village Farms), is now operating at its peak annual run rate of at least 75,000 kilos. 

An outdoor hemp grow farm, with the sun in the background.

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Secondly, Village Farms is generating a lot of buzz, without creating any actual buzz, with its hemp operations. The two hemp-focused joint ventures that Village Farms is a part of have planted nearly 600 acres and 120 acres of hemp in the U.S. this year. Hemp is rich in cannabidiol (CBD), the cannabinoid that doesn't get users high and is best known for its perceived medical benefits. With CBD being used in countless high-margin derivative products, Village Farms finds itself on the leading edge of a rapid growth trend.

Lastly, it could have everything to do with valuation. Pessimists have a sea of unprofitable pot stocks to choose from. It therefore makes little sense to focus on Village Farms, which is one of only two cannabis stocks with a lower forward P/E ratio than the broad-based S&P 500.


Next up is embattled pot stock Aphria (NASDAQ:APHA), which had its shares held short drop modestly from 21.35 million in mid-June to 20.51 million by mid-July. Although there wasn't much in the way of specific news events that reduced the level of pessimism surrounding Aphria, there are two distinct possibilities that make sense in the bigger picture.

For starters, Aphria has given back a good chunk of its value since peaking in early February. As you might be aware, Aphria was alleged by a short-seller report to have grossly overpaid for its Latin American assets last December. Although a special committee found that allegation to be false, it did uncover conflicts of interest in these transactions, eventually leading longtime CEO Vic Neufeld to step down. And, just months later, Aphria would wind up taking a 50 million Canadian dollar writedown on its Latin American assets anyway. All of this pessimism appears baked into the company's valuation at this point.

A cannabis leaf laid within the outline of the Canadian flag's maple leaf, with rolled joints and a cannabis bud to the left of the flag.

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Another reason to bet against Aphria that no longer makes as much sense are the issues that Health Canada has been contending with. Aphria's joint venture grow farm, known as Aphria Diamond, has been waiting more than a year for licensing approval from Health Canada. However, recently announced changes by the regulatory agency should help to speed up the review process. This should mean that Aphria's largest-producing facility when at peak capacity (140,000 kilos) should get the green light sooner rather than later.

Clearly, Aphria still has a ways to go to regain the trust of investors. But declining short interest suggests that it may be headed in the right direction, albeit after its share price has fallen substantially.


Third and finally, cannabis bottle rocket Tilray (NASDAQ:TLRY) has seen its short shares held drop from 7.18 million shares in mid-June to a more favorable 6.78 million shares as of mid-July. There look to be two very distinct reasons for pessimists to have eased on their conviction recently.

To begin with, Tilray, like Aphria, has given up a lot of its market value this year, meaning long-term short-sellers have made their point and are likely sitting on substantial gains. The decline in short shares held might simply represent profit-taking on the part of pessimists. After all, Tilray is still struggling for an identity, with CEO Brendan Kennedy announcing in March that the company would be focusing its efforts on the U.S. and Europe, as opposed to Canada, moving forward.

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Arguably the bigger catalyst of the two is the June 10 announcement that Tilray would acquire private-equity firm Privateer Holdings in a downstream merger. Privateer is Tilray's largest shareholder, with 75 million shares in its possession. By acquiring Privateer and selling these shares in an orderly fashion over the next two years, Tilray is removing the worry and uncertainty tied to what could have been an insider dump. Wall Street likes predictability, and investors no longer have to worry about being blindsided by massive insider selling from Privateer. 

Understand, though, that Tilray's push into new markets, and its ongoing reliance on wholesale cannabis to meet supply needs, is expected to push the company into the red for many quarters to come. Pessimists may have backed off temporarily, but my suspicion is they'll be back soon enough.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.