Academic studies show that short interest in a company's stock can be a better predictor of price trends than the recommendations of equity analysts. A large short position often indicates a weak share price down road (but not always, especially given exceptions such as convertible arbitrage, a strategy favoured by hedge funds). Let's look then at some highlights in short-selling activity among Canadian companies now that the Toronto Stock Exchange's short-interest tables for Oct. 15 have been released.
Canadian banks
Short selling of Canadian banks continues to build. According to the TSX report, Toronto-Dominion Bank recorded the largest increase in the number of shares sold short of all TSX companies during the two weeks to Oct. 15. Bank of Montreal and Canadian Imperial Bank of Commerce were also among the top companies registering large increases. Bank of Nova Scotia and Royal Bank of Canada had small declines, but their short positions remain among the largest.
Canadian banks also trade on the New York Stock Exchange, so adding in U.S. short interest (which is also increasing) provides a fuller picture. The accompanying table shows the results. U.S. data are for Sept. 30, so the table provides estimates of total shares short (and should be regarded as interim in nature until the U.S. data are released for Oct. 15, which could be up to a week from now).
Short interest for major Canadian banks
At least two observations can be made. First, the distribution of short sales varies widely across U.S. and Canadian markets. For example, 86 per cent of the short position in TD stock is on the TSX, while approximately 40 per cent is on the TSX for RBC. If one was looking at just TSX data, one could get the impression that short sellers were way more bearish on TD even though its total short interest is just slightly above Royal Bank's. Second, having 65.8 million shares short can look like a lot of bearish sentiment, but when compared with the number of shares trading (see last column in table), it may not be so scary – even if short selling is currently escalating. In the case of TD, for example, the short position is just 3.5 per cent of the float (freely trading shares). CIBC has the smallest number of shares short, but actually has the most bearish sentiment given its short position is 7 per cent of the float (the bank is the most exposed of the major banks to the risk of a recession and housing downturn in Canada).
Shopify
Shares in Ottawa-based Shopify Inc. trade on the TSX and NYSE. They do not appear on the latest TSX short-interest tables but are making a splash on NYSE's tables. As of Sept. 30, the short position in the United States stood at 2.4 million shares, a 55-per-cent increase over the level of Sept. 15 (and 27th largest on the NYSE for the period).
Shopify's stock is up more than 20 per cent since its May initial public offering on enthusiasm over the company's cloud-based commerce platform that lets small- and medium-sized businesses create their own online stores. Yet, there are hints of growing competition within this niche. Of note, Facebook Inc. is testing a "Facebook Store" that lets users sell products directly from their Facebook page.
BlackBerry
BlackBerry Ltd. had the fifth-largest increase in short selling on the TSX during the first two weeks of October, a rise of 2.3 million to 18.2 million shares. However, short interest in the United States fell by four million (in the last two weeks of September). That leaves 87.7 million shares short in the United States., or more than 100 million (estimated) if Canadian shorts are included. This latter position is close to 18 per cent of the stock float, a rather high level of bearishness.
Larry MacDonald is an economist, author and financial writer. His website is at larrymacdonald.serveblog.net/home.