A sign board displaying Toronto Stock Exchange stock information.Mark Blinch/Reuters
Bearish sentiment rose on the Toronto Stock Exchange during the first two weeks of May, as indicated on the TSX's latest short-interest tables by a 3.8-per-cent uptick in short interest for the iShares S&P/TSX 60 index ETF. However, its short interest remains 38 per cent below the peak reached in February, so current bearish sentiment is still well below its earlier height.
At the industry and company levels, nonetheless, there were some substantial changes in bearish bets. Let's look at the more notable cases: an energy ETF, Bombardier and gold miners.
Energy ETF
Short interest in the iShares S&P/TSX Capped Energy index ETF leaped from 10.7 million to 22.8 million units over the two weeks to May 15, an eye-catching jump of 113 per cent. With oil-and-gas stocks having rallied strongly on the back of a rebound in oil prices, short sellers may be speculating that the sector has become overbought – especially considering inventories of oil in storage are still at historically high levels.
Bombardier
The short position on Bombardier's class-B shares surged from 44.9 million to 53.1 million shares, an escalation of 18 per cent. Shares in the manufacturer of planes and trains have rallied strongly with the help of a big order from a U.S. airliner for the C Series airplane. But Bombardier still has a large debt load and negative cash flow. That's two big red flags for short sellers, who may now see the company's stock as overbought.
Gold miners
The TSX's table showing the largest decreases in short positions as of May 15 was well populated with gold mining companies. Those registering major drops over the first two weeks of May include: Kinross Gold Corp. (46 per cent), Barrick Gold Corp. (29 per cent) and B2Gold Corp. (27 per cent). The slowdown in global growth (following years of hyperstimulative policies) and rising tensions between the superpowers are creating an uncertain environment for investors, making gold more popular as a hedge.
Badger Daylighting
Calgary-based Badger Daylighting Ltd. does not appear on the TSX tables highlighting large short positions, but at 30 per cent, it does have one of the largest short positions as a percentage of shares outstanding, according to data provider Markit Inc. And considering the short position has grown steadily from 12 per cent of outstanding shares a year ago, it has had one of the more dramatic increases.
Badger Daylighting uses high-pressure water to move earth (which minimizes damage to cables and other underground infrastructure). About half of its revenues come from the oil and gas industry. It's possible the hit from the exposure to this hard-hit sector can be offset by growth in U.S. markets, but the disappointing results in the company's last quarter suggests there are grounds to "be leery about their U.S. growth potential," says Jerome Hass, a portfolio manager at Lightwater Partners Ltd.
Also, some investors may have once thought the company "had a formidable competitive advantage in being the first mover in their industry," observes Dan Lloyd, founder and portfolio manager at Sui Generis Investment Partners. "But there are no barriers to entry, so the company may see margin compression going forward."
Larry MacDonald is an economist, author and financial writer. His website is larrymacdonald.serveblog.net/home.