Cannabis short-sellers made US$432 million in December as stock prices tumbled, with Aphria Inc. in particular seeing a surge in both short interest and shares shorted amid ongoing questions about its financial dealings.

The weak month for pot stocks brought short sellers into the black for the year, with total mark-to-market profits of US$231 million, according to data from financial analytics firm S3 Partners. The BI Global Cannabis Competitive Peers index has lost 54 per cent for the year and 16 per cent for the month.

While short interest in the sector actually declined in December, falling by US$505 million for the 10 most-shorted stocks, this was due to lower share prices as opposed to short sellers covering their positions, S3 said.

Aphria is one stock that saw both an increase in short interest, up 32 per cent since Dec. 1, and number of shares shorted, up 72 per cent. The company has been under attack since Dec. 3 by short-sellers Hindenburg Research and Quintessential Capital Management, which accused the company of paying inflated prices for assets held by insiders.

Aphria shares continued their decline on the final day of the year, falling as much as 5.4 per cent in New York and as much as 7.9 per cent in Toronto as investors questioned a hostile takeover bid for the Canadian pot producer from Green Growth Brands Ltd. Hindenburg called the bid "non-credible'' and raised questions about connections between the two companies. Aphria’s shares dropped 21 per cent this month through Dec. 28.

However, other catalysts could shift momentum in the cannabis space, S3 said. December also saw tobacco giant Altria Inc. invest US$1.8 billion in Cronos Group and Budweiser brewer Anheuser-Busch InBev NV announced a research partnership with Tilray Inc.

"If M&A activity continues in the cannabis sector we may see increased short covering boosting stock price performance,'' Ihor Dusaniwsky, managing director at S3, wrote in an analysis. "Cannabis short sellers will be exposed to sudden and outsized price moves due to M&A activity, which may dampen future short sale activity, but for now shorts are partying into the new year.''

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