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Inside the Market Short sales on the TSX: What bearish investors are betting against

Companies with a substantial number of shares sold short tend to underperform, according to academic studies. So, if you have a long position in such a company, you might want to double-check your thesis. Or, if you do short sales of your own, screening for such companies may generate a few trading ideas.

The first table, provided by New York research firm S3 Partners, shows Canadian companies with the highest percentage of shares sold short as of mid-July. A caveat: Not all short sales are necessarily bets on lower stock prices – sometimes they reflect hedging or arbitrage operations.

Top 10 companies with the highest percentage of shares short (as of July 17)

CompanyTicker% of float sold shortBorrow fee (annualized)
Tilray Inc.TLRY-T30.5%45.1%
Genworth MI Canada Inc.MIC-T26.7%0.9%
Cronos Group Inc.CRON-T24.2%7.6%
Home Capital Group Inc.HCG-T22.8%2.4%
Canada Goose Holdings Inc.GOOS-T19.2%0.9%
Canopy Growth Corp.WEED-T19.1%25.6%
Westshore Terminals Corp.WTE-T17.5%0.3%
Equitable Group Inc.EQB-T17.1%3.6%
Tucows Inc.TC-T16.3%1.5%
Seabridge Gold Inc.SEA-T15.8%2.1%

Data source: S3 Partners

For interlisted stocks, U.S. trades are included in the totals (after converting to C$).  Float = company shares not closely held by long-term shareholders, such as employee stock ownership plans. Borrow fee = annualized cost to borrow shares, dividends excluded.

The table is well populated with firms in the cannabis and housing-related sectors. From the cannabis sector, there is Tilray Inc., Cronos Group Inc. and Canopy Growth Corp.; from the housing-related sector there is Genworth MI Canada Inc., Home Capital Group Inc. and Equitable Group.

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In the cannabis sector, short-sellers are focused on sky-high valuations and oversupply risk. In the housing-related sector, they are concerned that Canadian house prices are a bubble that will burst and drag down businesses insuring mortgages and offering non-prime mortgages.

Further evidence of bearish sentiment for cannabis stocks is shown by the high cost to borrow their shares (short sales involve borrowing shares and selling them). The low borrowing costs for housing-related stocks makes it easier for investors to take short positions.

Westshore Terminals Investment Corp., which operates a Port of Vancouver terminal, is relatively new to the table. More than half of its shipments last year came from coal miner Teck Resources Ltd. But this large customer is now looking at shipping through other terminals, according to New York research firm Seaport Global.

Stocks with major short interest may experience a short squeeze (stock price spikes upward when short-sellers rush to buy shares to close out positions). High insider buying is one warning. However, none of the companies on the table had significant insider buying, according to Vancouver-based INK Research.

The second table shows the 10 companies with the biggest increases in short positions over the month to July 17. It highlights mostly larger companies, which tend not to appear much on the preceding table because their floats are so huge that the percentage of shares short is typically low.

Top 10 companies with the largest increase in short position (as of July 17)

CompanyTickerOne month change to July 17 ($million) Short interest as of July 17 ($million) % change in short interest over the month
Enbridge Inc.ENB-T$187.2 $2,839.3 7.1%
Toronto-Dominion BankTD-T$168.0 $3,903.9 4.5%
Aurora Cannabis Inc.ACB-T$166.4 $503.7 49.3%
Bank of Nova ScotiaBNS-T$136.7 $2,407.0 6.0%
First Quantum Minerals Ltd.FM-T$127.3 $724.7 21.3%
Waste Connections Inc.WCN-T$122.4 $294.9 71.0%
BCE Inc.BCE-T$120.4 $2,301.4 5.5%
Manulife Financial Corp.MFC-T$104.4 $478.8 27.9%
Canada Goose Holdings Inc.GOOS-T$76.6 $170.4 81.6%
Imperial Oil Ltd.IMO-T$74.5 $629.9 13.4%

Data source: S3 Partners

For interlisted stocks, U.S. trades are included in the totals (after converting to C$)

Canada Goose Holdings Inc., maker of the iconic winter coats, appears in eighth spot on the table – but has the highest percentage increase. It also appears on the first table, with 19.2 per cent of its float sold short. That’s pretty strong bearish sentiment.

The retailer’s share price has rallied strongly since the 30-per-cent plunge in May, triggered by an earnings miss and a reduction in guidance. However, insiders have been selling into the rally, bringing insider net selling to $48.8-million over the past 12 months, INK Research reports.

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Update on activist short-sellers

Activist short-sellers became less interested in Canadian stocks during the first half of 2019, with just three campaigns launched. This was the biggest year-over-year drop for all of the countries tracked in a global survey by Breakout Point, a financial-research firm headquartered in Dusseldorf, Germany.

The three firms targeted were FSD Pharma Inc. (cannabis), Village Farms International Inc. (cannabis) and Tucows Inc. (internet domain registry). The websites of the respective short-sellers, White Diamond Research, Citron Research and Kerrisdale Capital, offer explanations for their positions.

Campaigns started in previous years by activist short-sellers are still continuing. Of note is the “short the banks” crowd led by Steve Eisman at Neuberger Berman, Tavi Costa at Crescat Capital and Brad Safalow at PAA Research.

Two Canadian short-sellers active in Europe

Two Canadian investment managers are big short-sellers in Europe, holding spots on a top-10 list compiled by Breakout Point. The two are Connor, Clark & Lunn Investment Management Ltd. and the Canadian Pension Plan Investment Board (CPPIB).

A top-10 list can be drawn up because European regulators require disclosure of short positions in excess of 0.5 per cent of a company’s shares. Connor, Clark & Lunn currently has 43 such positions, up 65 per cent from a year ago. CPPIB has 29 positions, up nearly 100 per cent from a year ago.

European regulators report that Connor, Clark & Lunn has a $36-million short position in Toronto-based Dream Global REIT, also listed on the Frankfurt Stock Exchange in Germany. Many of the investment firm’s bearish bets are doing well, but this one has gone against them by 55 per cent.

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