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Canada’s market rally is no ‘dash for trash’ Add to ...

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Informative analysis from U.S.-based Bespoke Investment Group highlighted a “dash for trash” in equities south of the border, with the most shorted stocks outperforming by the widest amount. In the Canadian market, there has been no clear relationship between most-shorted stocks and recent performance during the rally but, in the end, it comes down to how we define “trash.”

Unlike the U.S. market, the most-shorted stocks in Canada were the worst-performing stocks since the market bottom, not the best. The top performing decile in the TSX was the seventh with an average return of 18.7 per cent – a group with a low short interest relative to the rest of the benchmark.

Three companies in Decile 7 provided the bulk of the upside – Bonavista Energy Corp.’s 68-per-cent return, Silver Wheaton Corp.’s 41-per-cent appreciation and Barrick Gold’s 46-per-cent return from the January market low. Eldorado Gold and Agnico Eagle Mines also helped boost the numbers.

In each case, the reasonably small short positions are less a function of objectively strong balance sheets and outlooks, and more because there are weaker stocks in the energy and precious metals sectors that make for better shorting opportunities. In other words, these stocks are resilient and benefiting from being “relatively” strong in an index chock full of beleaguered commodity stocks.

For investors, these patterns support an emphasis on higher quality stocks with strong balance sheets. It makes little sense to own bankruptcy risk in any sector if the higher quality names are generating stronger performance during market recoveries.

Follow Scott Barlow on Twitter @SBarlow_ROB.

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