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Number Cruncher

The surprising payoff from shorted stocks Add to ...

What are we looking for?

Stocks that are heavily shorted but may be worth a second look for opportunistic investors.

More about today’s screen

Last week, we looked at stocks with heavy short positions and looked at how they perform over the long term.

Morningstar CPMS helped us with this by sorting through the list of 680 Canadian stocks it follows and finding the 15 with the most number of days required to cover short interest. The calculation was made by taking the latest short interest and dividing it by daily average volume over last 200 days.

CPMS then looked back to 2003 (when it started to record short interest data) and found that a portfolio of the most heavily shorted stocks indeed did poorly and underperformed the S&P/TSX composite total return index by about six percentage points annually, assuming an equal weighting of each of the 15 names and reselecting new names each month.

This week, CPMS is taking the most heavily shorted stocks but screening for:

– Positive earning expectations (median analyst estimate has to be greater than zero)

– Year-over-year trailing sales growth greater than the median stock in the CPMS database (currently 4.6 per cent)

– Year-over-year trailing earnings growth is greater than the median stocks in the CPMS database (currently 11.9 per cent)

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What did we find out?

CPMS ran this week’s portfolio strategy going back to 2003 again and found that applying these three factors to heavily shorted stocks created much different results. The portfolio this week has returned 14.75 per cent annualized since 2003, solidly beating the S&P/TSX composite total return benchmark of 11.1 per cent. Over the last year, this portfolio has returned 42 per cent, versus 20 per cent for the benchmark.

“[This screen] show how the shorts are not always right and tend to get squeezed in many of these higher quality names,” said Jamie Hynes, senior consultant with CPMS.

Follow on Twitter: @ScottAdams_Edit

 

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