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Cannabis-sector carnage continued on Monday as pot-stock investors took another gigantic hit.

The Horizons Marijuana Life Sciences ETF (HMMJ) fell more than 10 per cent, approaching the worst one-day drop in its history – set just a week ago. The biggest players in the sector all saw double-digit declines in their shares, with Aphria Inc., Tilray Inc., Canopy Growth Corp. and Aurora Cannabis Inc. all down between 14 per cent and 17 per cent.

Curaleaf Holdings Inc., which did a private offering at $11.45 on Friday, started trading on the Canadian Securities Exchange on Monday and closed at $7.30, a drop of 36 per cent.

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All told, the 62 companies in the Solactive North American Marijuana Index had lost a combined $31-billion from their closing prices on Oct. 16, the day before legalization, to Monday’s close, according to S&P Global Market Intelligence. Of the 62, 24 are down by more than 30 per cent, cumulatively, in those nine trading days.

Some of the more cautious observers feared cannabis stocks might suffer after pre-legalization excitement ended. Then, forecasts that supply would not meet demand have come true, as cannabis sellers across Canada scale back hours or fail to make timely deliveries.

All this, of course, has happened against a backdrop of declines in the broader markets, even if the tumbles are not nearly as pronounced. The S&P/TSX Composite and the S&P 500 are down between 5 per cent and 6 per cent since Oct. 16.

Still, each day seems to bring negative news that can give cannabis investors a reason to run.

On Monday, GMP Securities analyst Martin Landry cut his sales and profit estimates for Canopy, saying: “The first 12 days of the recreational marijuana market have been disappointing from a distribution standpoint. … We now expect that Canadian recreational sales will be more muted than expected in the near-term.”

While maintaining his “buy” rating based on a $5-billion investment by Constellation Brands Inc., Mr. Landry cut his revenue estimate for the current fiscal year from $469-million to $288-million. He now says he expects negative EBITDA, or earnings before interest, taxes, depreciation and amortization, of $53, versus a break-even estimate before.

Russell Stanley, an analyst at Beacon Securities Ltd., suggested the $400-million share offering by Curaleaf “may have temporarily overwhelmed the market’s willingness to buy, given the broader selloff in the cannabis space over the past two weeks.”

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While the recent losses have made pot stocks “cheaper” than their current peaks, Mr. Stanley notes they are still trading 37 per cent above their average earnings multiple of the past 12 months. And HMMJ has now broken through its 200-day moving average. “In other words, both the fundamentals, based on multiples, and the technical, based on the chart, suggest the selloff could have further to go.”

That’s good news for short-sellers, who are increasing their bets that pot stocks will keep falling. Samuel Pierson of IHS Markit says shares shorted, as a percentage of shares outstanding, is up to 3 per cent from 2.5 per cent at the beginning of October.

Short sellers borrow shares, sell them, and aim to repay the loan by buying the stock later at lower prices. When stock prices rise instead, the short sellers may try to “cover” by buying the stock earlier than they had intended.

“Overall, there was not a major move toward short covering when the valuations skyrocketed as the result of Constellation’s further investment in Canopy and go-live date for legalization, and there has not been an indication yet of covering to lock in recent gains,” he said, referring to the run-up before Oct. 16.

Jason Zandberg of PI Financial Corp. said “this is not the first sector-wide sell-off in the cannabis market – we have seen three other similar sell-offs since 2016.” Using Canopy as a proxy, he says the stock fell 39 per cent in eight days in November, 2016, but hit a peak 11 months later. It also declined by 43 per cent in 19 days and 25 per cent in 23 days in separate 2018 swoons.

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