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The Toronto Stock Exchange has published its short-selling tables for Dec. 15, so let's look at some of the companies with substantial jumps in short selling. Such jumps are not always a bearish sign but they do have a tendency to foreshadow weak share prices, according to academic studies.
Short interest at the market level, for its part, did appear to lead market movements in 2015. Short sellers' bets against the iShares S&P/TSX 60 Index exchange-traded fund (XIU) climbed steadily over the first four months of the year, doubling to 53.9 million units by April 30. That's when the TSX began a 10-per-cent downtrend for the next four months.
During the market downturn, short interest in XIU rose further and reached a peak of 94.9 million on Aug. 31. At that point, the market became range bound and bearish sentiment in XIU began trending down, to 62.4 million units by Dec. 15.
While the drop in short selling at the market level suggests a favourable outlook for stocks in early 2016, there were, nonetheless, notable increases in the Dec. 15 tables for several companies. Let's highlight four: Data Group Ltd., Suncor Energy Inc., Thomson Reuters Corp. and Canadian National Railway Co.
Data Group
During the two weeks ending Dec. 15, short interest in shares of Data Group jumped to 6.4 million from 300,000. Data Group is a printing company seeking to develop digital products. The transition has been a challenge and the company's share price has fallen to the current level near 2 cents.
Data Group is redeeming about 75 per cent of its 6-per-cent convertible subordinated debentures on Dec. 23, giving holders 29,086 common shares for each $1,000 in principal. This will result in more than a tenfold increase in the number of shares outstanding, to nearly one billion.
The sudden surge in shares could lead to selling pressures and lower prices that are profitable for short sellers. The latter also stand to profit if the company goes out of business.
Suncor Energy
In the midst of plunging oil prices, Suncor Energy's stock is holding up well thanks to its strong balance sheet, low breakeven costs and refining operations that allow it to remain profitable in down markets. Yet, short interest jumped 25 per cent during the two weeks to Dec. 15, hitting an estimated 35 million shares on U.S. and Canadian exchanges.
Much of the short selling could be related to Suncor's takeover bid for Canadian Oil Sands Ltd. Sophisticated traders often engage in merger arbitrage – they go long the shares of the company to be acquired and short on the company making the acquisition. If the bid is successful, the acquired company's shares rise to the bid price while the acquiring company shares may weaken, especially if the market thinks it is overpaying.
Such could be the case for Suncor. According to Canadian Oil Sands' projections, it would earn free cash flow of 36 cents a share at an oil price of $55 (U.S.) a barrel. Even if current oil prices increase by more than 40 per cent to this level, "Suncor would still be paying 24-times free cash flow," notes Benjamin Sinclair, an investment analyst with Motley Fool. "That's a steep price to pay for a heavily indebted oil sands company with few growth prospects."
Thomson Reuters
About 26 million shares in Thomson Reuters were sold short on U.S. and Canadian exchanges as of Dec. 15, an increase of nearly 50 per cent from Sept. 30. Thomson Reuters is a global provider of specialized information and analytics to businesses and professionals.
In the company's third quarter ending Sept. 30 (reported in U.S. dollars), a 1-per-cent rise in revenues was turned into a 4-per-cent decrease due to conversion of foreign currency sales into the stronger U.S. dollar. With the U.S. Federal Reserve embarking on a policy of higher interest rates – having last week hiked its benchmark rate by a quarter point, the first increase in nearly a decade – the U.S. dollar could continue to gain strength and further drag down Thomson Reuters' financial results.
Also, Thomson Reuters' Eikon platform, which offers financial information similar to Bloomberg terminals, is facing greater competition due to the launch of Symphony, a messaging and analytics service. The latter is backed by Google Inc. and financial institutions such as Goldman Sachs Group Inc.
Canadian National Railway
During the first two weeks of December, short sellers raised their bets on Canadian National Railway by nearly 25 per cent to about 20 million shares on U.S. and Canadian stock markets. On May 31, there were 9.9 million shares short.
Canadian National Railway is one of the better-run companies in Canada and its stock has had a good run over the years, but the downturn in the commodity sector may be nipping at its heels. As commodity prices fall, producers are closing mines and oil wells, reducing shipments on railway cars.
Larry MacDonald is an economist, author and financial writer who blogs at larrymacdonald.serveblog.net/home.