There are obvious reasons why a Canadian company might want to list its shares on a U.S. exchange. It opens up the field of investors to millions more potential shareholders.
But be careful what you wish for: Being in the spotlight can also draw the world's attention to flaws that companies would rather leave in the shadows.
When the New York Stock Exchange totalled up its list of the most-shorted stocks at the end of January, a startling five of the top 10 names were either Canadian-headquartered or used the Toronto Stock Exchange as their primary listing.
When stocks are heavily shorted, it means that there are a fair number of people who believe the shares are headed down. By short-selling a stock, an investor is betting against it by borrowing shares, and then selling them. If the price declines, the investor can make money by buying the shares back at a lower price before returning them. (Some shorting takes place to hedge a portfolio, not to simply profit from a company's misfortune.)
Many of these lists focus on the names that have the largest number of shares shorted. They're dominated by companies that have many hundreds of millions of shares outstanding. In uncovering the Canadian connection, I looked instead at the list of largest "short interest ratios." This compares the number of shares sold short to the average daily volume for the stock and reveals how many trading days it would take to "cover" the short position by buying shares.
It is here that Canadian companies are most prominent. Consider this: There are nearly 2,700 companies listed on the New York Stock Exchange, but only 77 of them consider the TSX their primary home, according to Standard & Poor's Capital IQ. So, five out of 10 is pretty significant.
"It definitely points out that foreigners might see certain Canadian companies in a different light than Canadian investors," says Anthony Scilipoti of Veritas Investment Research, a Toronto firm that often takes a skeptical view of stocks (including a few on this list).
A close look at these names suggests why some investors are so downbeat.
Mississauga-based Imax Corp., which ranks No. 3 on the list, has been one of the best stories in movie-exhibiting, with potential for international expansion unlike any other North American operator. And investors have paid up for that story: Its forward price-earnings ratio remains near 30, even as the shares are about 15 per cent off the 52-week high. The company is making a big push into China, which is likely good for the long term. But the increasing concern about the Chinese growth story is a near-term weight on the shares. Another is the question of intellectual property; a recent New York Times story detailed how Imax alleges the government-owned movie company that oversees a competing large-screen system has stolen Imax technology.
The pessimism about Canadian Imperial Bank of Commerce (No. 4) is clearly grounded in Canada, however. It's well-known that CIBC has the largest exposure to the Canadian consumer and the domestic economy (roughly two-thirds of its business, versus an average of 40 per cent at its peers). That's made CIBC cheaper, generally, than other Canadian banks. Not cheap enough, apparently.
The saddest thing about Ritchie Bros. Auctioneers Inc.'s place on the list is that it's not expensive because of recent big gains; its shares are barely ahead of where they were two years ago (when, incidentally, I suggested the shares were overvalued). And yet, the seller of construction equipment (No. 7) has a pricey forward P/E of 26, as bulls keep waiting for the company to attain pre-financial-crisis earnings levels.
CGI Group's bull story might have come unwound when it got tagged with bad publicity for its role in building health-insurance websites for Obamacare. Before that, though, Veritas and others questioned whether accounting choices CGI made in a recent acquisition would boost the company's future profits in ways its investors didn't understand. CGI, No. 8, said last August that its big shareholders were aware of the questions and were holding or buying anyway.
Thomson Reuters Corp. (No. 10) is technically headquartered in New York, but it lists primarily in Toronto. (The chairman of Thomson Reuters is David Thomson. Woodbridge Co. Ltd., the Thomson family's holding company, is the majority owner of The Globe and Mail.) It's selling for 19 times estimates of its forward earnings – a sum appropriate for a growing company. But Thomson Reuters has been cutting costs to maintain profits in the face of falling sales. Analysts' consensus estimates for 2016 revenues are below 2012 levels, according to Capital IQ.
All of these are bright lights in the constellation of Canadian corporations. Outside our borders, however, some investors have taken a dimmer view.
David Milstead