Investors betting against cannabis companies have much to celebrate as stocks sputter and swoon.

S3 Partners says while the 20 largest shorts in the sector were down $1.78 billion in mark-to-market losses in the first quarter of 2019, they were up $336 million in mark-to-market profits in the second quarter and are up $1.17 billion so far in the third quarter. On Monday, a day of price weakness for cannabis stocks, shorts in these stocks were up $100 million in mark-to-market profits. Short sellers of these stocks are $276 million in the red year-to-date, a remarkable improvement from the end of July when they had $690 million in year-to-date losses.

Cannabis stocks enjoyed tremendous gains last year as analysts worried they were overvalued and even behaving like Bitcoin. "We think things have gotten a little bit silly," Sean Stiefel, founder and cannabis portfolio manager of Navy Capital, said to CNBC exactly a year ago. "Valuations now have truly gotten ahead of themselves, and the retail investor here is now buying air, effectively." But things are very different now, and supply concerns, scandals, weak results and share-based dilutions are among the factors blamed. The largest marijuana exchange-traded fund by assets, ETFMG Alternative Harvest ETF (MJ), has fallen 22% in the last three months and returned around 2% so far this year. The first 10 days of the month saw an overall increase in short covering and shares shorted in the sector decreased by $16.7 million.

Short interest in the cannabis sector is currently at $5 billion and has risen $2.20 billion or 79% in 2019. It is concentrated in a few stocks with the top 20 shorts making up over 84% of the total shorting. According to S3, the top three stocks with the most short interest are Canopy Growth Corp. (CGC), Aurora Cannabis Inc. (ACB) and GW Pharma - ADR (GWPH). The shorts that have delivered the highest total profits year-to-date to cannabis bears are CannTrust Holdings Inc. (CTST), Charlotte's Web Holdings Inc. (CWBHF) and Tilray Inc. (TLRY). 

The financial technology and analytics firm says investors can't rule out the possibility of short squeezes in the sector despite the recent mark-to-market profits, naming Tilray, Aurora Cannabis and Aphria Inc. (APHA) as likely candidates if the stocks start to rally once again. "Their high financing costs due to lending illiquidity and in the case of Aurora and Aphria, continued large year-to-date mark-to-market losses make them more susceptible to short squeezes during upward trending markets," said managing director of predictive analytics, Ihor Dusaniwsky. Future partnerships or consolidations in highly shorted cannabis stocks could quickly force short sellers to cover their positions and push stock prices even higher, according to Dusaniwsky. "The sector continues to be volatile and ripe for sudden and impactful price reversals which can be a boon or a bust for short sellers."