Financial-analytics firm S3 Partners LLC follows trends in short sales of stocks and sends out alerts whenever significant changes are spotted. For many investors, this can be useful information: A jump in short sales can be a signal to avoid or sell a stock; a large decline can be a signal to buy.
(In a short sale, the investor sells borrowed securities in anticipation of a price drop and must return an equal number of shares at some time in the future; the short seller makes money if the stock goes down in price.)
S3 Partners usually focuses on U.S. stocks. But Ihor Dusaniwsky, head of research at the firm, recently compiled a table of Canadian stocks for The Globe and Mail showing large increases and decreases in short positions. Readers will note it is different from tables based on the number of shares sold short. Mr. Dusaniwsky prefers instead to show changes in the dollar value of shares shorted.
The number-of-shares method that is often seen can be misleading in some ways. For example, a million shares shorted at a cent each amounts to a bearish wager of only $10,000. Also, a change in the number of shares can be offset by a change in share price so that there is actually little change in the dollar value of a short position.
The data in Mr. Dusaniwsky's table reveal some interesting developments. Of note, pipeline firm Enbridge Inc. had the largest increase for both the weekly and monthly periods up to Oct. 17 (the value of its short position is now four times higher than what it was 18 months ago).
Enbridge's hefty dividend is regularly increased and analysts are positive these days. So the short selling is sounding a discordant note, despite the impending merger with Spectra Energy Corp. One problem, as Sui Generis Canada Partners portfolio manager Daniel Lloyd has noted: Valuation, like other yield plays, has become rich from investors chasing yield in a low interest-rate environment.
This puts the stock at risk, especially if interest rates begin to trend up and compete with dividend stocks for investors' capital. There is also a huge debt load with a carrying cost that could escalate substantially. Another point, made recently by Triumph Asset Management founding partner Bruce Tatters on BNN, is that pipelines face lower shipment volumes as conventional energy producers retrench in a world of lower prices.
Another security with a substantial hike in short interest is the iShares S&P/TSX 60 Index ETF. Since January, its price has run up 23 per cent, buoyed by rallies in commodity prices. However, the S&P/TSX composite index is now overvalued, trading at more than 20 times trailing earnings, while the global economy and corporate earnings remain lacklustre.
The increase in Potash Corp. of Saskatchewan's short interest was the fifth largest on the week. This raises the short position to $1.8-billion, double the amount at the beginning of the year.
Potash Corp. and Agrium Inc. are planning to merge as equals by the middle of 2017, but the combined entity will remain a cyclical play, with its stock price still tied to potash prices. These prices have sunk from $900 (U.S.) a tonne in 2008 to less than $300 a tonne, because of the global slowdown and the potash cartel breaking down in Europe. With oversupply still a problem, there is little sign yet of a bounce off the bottom.
Agrium, by contrast, recorded a decline of $426.1-million (Canadian) in its short position during the month, leaving a balance of just $265.1-million. One explanation, at least in part, could be that short sellers may be unwinding their bets because of the chance Agrium shareholders could be offered a premium to agree to the merger.
His website is at larrymacdonald.serveblog.net/home.