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Inside the Market What bearish investors are betting against: TSX short sellers sharpening attack against pot stocks

It's worth casting an eye toward the short sellers periodically.

If you own a stock that they are heavily targeting, you might want to double-check your thesis. Or, if you do some short selling yourself, there could be an idea for a trade or two.

Short sellers borrow shares and sell them on the expectation they can be returned at a lower price. Their bearish bets do not always pan out, but academic studies have found that they tend to get it right.

During the second week of each month, the Globe and Mail publishes tables of Canadian companies that are attracting substantial short interest. Those for February are presented below.

The 20 companies with the highest percentage of shares loaned out (Feb. 13)

CompanyTickerSector% of Shares Short% Change over Month
Quebecor Inc.QBR.B-TMedia21.9%5%
Badger Daylighting Ltd.BAD-TCapital Goods21.6%-9%
Boardwalk Real Estate Investment TrustBEI.UN-TReal Estate19.0%-1%
First Majestic Silver Corp.FR-TMaterials18.2%30%
DHX Media Ltd.DHX.B-TMedia16.8%7%
Klondex Mines Ltd.KDX-TMaterials13.7%4%
Pretium Resources Inc.PVG-TMaterials13.6%31%
Labrador Iron Ore Royalty Corp.LIF-TMaterials12.0%8%
Genworth MI Canada Inc.MIC-TBanks11.9%-1%
Canadian Western BankCWB-TBanks10.6%-10%
Crew Energy Inc.CR-TEnergy10.3%-14%
Birchcliff Energy Ltd.BIR-TEnergy10.1%51%
Kelt Exploration Ltd.KEL-TEnergy10.1%-6%
Home Capital Group Inc.HCG-TBanks9.9%1%
Maxar Technologies Ltd.MAXR-TCapital Goods9.7%16%
Cineplex Inc.CGX-TMedia8.9%-1%
Eldorado Gold Corp.ELD-TMaterials8.1%14%
Sandstorm Gold Ltd.SSL-TMaterials8.1%4%
Meg Energy Corp.MEG-TEnergy7.7%6%
Transcontinental Inc.TCL.A-TServices7.6%-1%

Source: IHS Markit

Table I shows the 20 Canadian companies with the highest percentage of shares on loan as of Feb 13. The data was provided by data-analytics firm IHS Markit.

The majority of companies on the table have made appearances each month since the updates began in November. However, many have seen a reduction of one-quarter to one-half in the percentage of shares loaned out. Cases include: Quebecor Inc., Badger Daylighting Ltd., DHX Media Ltd., Klondex Mines Ltd. and Canadian Western Bank. A smaller number of companies are seeing their percentages creep upward, notably Boardwalk REIT and First Majestic Silver Corp.

A newcomer bursting onto the table is Birchcliff Energy Ltd. Its percentage of shares loaned out had the biggest jump over the previous month, soaring 51 per cent.

Birchcliff Energy is an Alberta energy company, with three-quarters of its production allocated to natural gas. The management and the balance sheet look strong. And the shares are cheap, trading considerably below their historical price-to-book value ratio. But delays in building pipeline capacity are restricting shipments of natural gas to markets outside of Alberta. As a result, there is a glut in the province that is bringing prices down to very low levels.

The 20 most expensive shares to borrow (Feb. 13)

CompanyTickerSectorCost to Borrow (Annual %)
Acasti Pharma Inc.ACST-TPharmaceutical70.5%
Horizons Marijuana Life Science ETFHMMJ-TMarijuana53.1%
Harvest One Cannabis Inc.HVT-TMarijuana43.4%
Emerald Health TherapeuticsEMH-TMarijuana39.9%
Cannabis Wheaton Income Corp.CBW-TMarijuana39.4%
The Hydropothecary Corp.THCX-TMarijuana33.4%
Organigram Holdings Inc.OGI-TMarijuana32.4%
Mogo Finance Technology Inc.MOGO-TFinTech31.9%
Street Capital Group Inc.SCB-TMortgages31.8%
Medreleaf Corp.LEAF-TMarijuana29.8%
Lithium Americas Corp.LAC-TResources27.9%
Novo Resources Corp.NVO-TResources22.4%
Imperial Metals Corp.III-TResources21.8%
The Supreme Cannabis Co. Inc.FIRE-TMarijuana21.8%
Garibaldi Resources Corp.GGI-TResources21.8%
Wealth Minerals Ltd.WML-TResources21.4%
Canopy Growth CorpWEED-TMarijuana21.3%
Lithium X Energy Corp.LIX-TResources20.3%
Leonovus Inc.LTV-TFinTech20.0%
Badger Daylighting Ltd.BAD-TCapital Goods19.2%

Source: Interactive Brokers

Table II shows the 20 Canadian companies with the highest cost to borrow shares, based on data from Interactive Brokers. When short sellers bid up borrowing costs for shares, it is usually a sign of increased bearishness.

Nearly half of the companies on table are from the marijuana sector. Bearish sentiment has thus returned to the high levels of two months ago, following a drop-off last month when many short sellers unwound their bets during a vigorous rally in marijuana stocks.

Another sign of heightened bearishness is the escalating cost to borrow units of the Horizons Marijuana Life Science ETF. It has climbed from 33.8 per cent in November to 53.1 per cent in February.

At 70.5 per cent, Acasti Pharma Inc. has the highest cost to borrow on the table. It markets a krill-oil extract for lowering triglycerides, which is a type of fat in the blood associated with heart disease. The company is also developing a prescription drug, CaPre, for the treatment of elevated triglyceride.

After trading above $40 on the Nasdaq in 2013, Acasti Pharma's shares are currently hovering just above $1, the minimum bid requirement for maintaining a listing on that exchange. The loss-making company completed the Phase 2 trial for CaPre over a year and a half ago. The Phase 3 trial has not yet started.

In November, Acasti Pharma shares more than doubled to $3 when the company announced it was negotiating with a Chinese pharmaceutical company to commercialize CaPre in Asia. The shares sold off afterward, accelerating when a public offering of stock and warrants was announced mid-December.

Top 20 percentage increases in short interest (Feb. 13)

CompanyTickerSector1 Month Increase %1 Month Increase $Short Interest $
Gold Standard Ventures Corp.GSV-TMining19852.7%$15,774,018$15,853,474
CanniMed Therapeutics Inc.CMED-TMarijuana1271.3%$11,843,136$12,774,715
BMO S&P 500 Hedged To CAD ETFZUE-TETF775.9%$10,266,193$11,589,339
H&R REITHR.UN-TREIT685.0%$151,945,233$174,127,623
Horizons Betapro Natural Gas Bear 2x ETF HND-TETF344.0%$23,585,861$30,442,027
Valeura Energy Inc.VLE-TOil & Gas285.8%$11,766,656$15,883,727
Canada Goose Holdings Inc.GOOS-TApparel206.3%$31,349,652$46,546,205
Celestica Inc.CLS-TElectronic101.4%$28,263,505$56,145,388
Pure Industrial REITAAR.UN-TREIT67.4%$9,709,595$24,126,620
Manulife Financial Corp..MFC-TInsurance67.3%$395,279,285$982,332,120
Waste Connections Inc.WCN-TWaste65.7%$108,903,553$274,682,798
Lundin Mining Corp.LUN-TMining62.0%$48,841,908$127,678,075
Enbridge Inc.ENB-TOil & Gas45.3%$1,154,574,334$3,703,373,557
Brookfield Infrastructure Partners L.P.BIP.UN-TUtilities41.8%$31,557,193$107,104,991
Riocan REITREI.UN-TREIT39.0%$28,701,072$102,332,042
Imperial Oil Ltd.IMO-TOil & Gas38.8%$207,044,211$740,812,790
Agnico Eagle Mines Ltd.AEM-TMining35.5%$53,513,976$204,389,298
CGI Group Inc. GIB.A-TInformation Tech33.9%$74,707,627$295,151,717
Superior Plus Corp.SPB-TUtilities33.8%$10,469,085$41,409,159
Parkland Fuel Corp.PKI-TOil & Gas29.1%$14,516,545$64,443,422

Source: S3 Partners LLC

Table III shows the 20 companies with the largest percentage increases in the dollar value of short positions, based on data from S3 Partners LLC. While the dollar value of shares short is not all that informative on its own, changes over time can highlight shifts in bearish viewpoints. Companies with less than a $5-million increase in short position were screened out.

There was very little carry-over from last month's Table III. An exception was Canada Goose Holdings Inc. Short interest for the apparel company moved up from $11.5-million to $46.5-million, a cumulative increase of 300 per cent over the past two months.

Its fur-lined parkas selling for more than $1,000 are very popular, with line-ups at stores to buy them. Sales and earnings are growing in leaps and bounds, fuelling more than a doubling in share price since the initial public offering last March.

This has made valuation rich and the stock vulnerable to the slightest bad news – which occurred earlier this month when the third-quarter report was released without an upward revision in the company's guidance for 2018 sales. The share price plunged 20 per cent, in response. Since then, there has been a rebound that has recouped about half the reversal.

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