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Short positions for companies in the S&P/TSX 60 index continue to edge down, according to data and analytics company IHS Markit.

Shorting a stock is when an investor borrows shares and immediately sells them, hoping to scoop them up later at a lower price, return them to the lender and pocket the difference. As of mid-November, an average 1.8 per cent of outstanding shares were lent out to short sellers, extending the downward trend in place since late 2015, when short interest peaked at 5.5 per cent of outstanding shares lent out.

Nonetheless, short-selling activity was quite elevated in November for several Toronto Stock Exchange companies on the basis of the percentage of shares on loan.

The 10 TSX companies with the highest percentage of outstanding shares short as of mid-November are shown in the first accompanying table.

Most of the companies were also in the top-10 list from October.

For discussions on Quebecor Inc., Badger Daylighting Ltd., AGT Food And Ingredients Inc. and Canadian Western Bank, see the Oct 23, 2017 Globe and Mail article, “Short sales on the TSX: What bearish investors are betting against,” available online at
.

Bursting onto the list this month with a huge jump to 20 per cent of shares lent out is DHX Media Ltd., a company that creates and distributes children's shows. At the beginning of 2017, just 5 per cent of shares were on loan. Quarterly financial reports have disappointed as mature program offerings, such as the Teletubbies series, underperform in markets outside of Canada. Growth could be rekindled with the acquisition of the Peanuts and the Strawberry Shortcake franchises, but the higher debt load taken on to finance these acquisitions presents a risk.

There is another way to determine the level of bearishness among investors and their appetite to bet against stocks. Data from the brokerage firm Interactive Brokers identifies the cost to borrow shares (for companies with relatively few shares available for lending, the only way to tell if short-sellers are bearish is if the cost of borrowing has been bid up).

The top-10 TSX companies with the highest-cost-to-borrow shares as of mid-November are shown in the second chart. These are annual rates, calculated daily. They are also net of the interest earned on cash held as collateral. Small investors do not usually get this rebate from brokers, so the lending rate shown in the table would be a bit higher for them if they were to borrow shares.

At the top of the list are two mortgage-lending companies, Street Capital Group Inc. and MCAN Mortgage Corp. Stocks tied to the Canadian housing sector have been favourite targets of short-sellers for years, as escalating house prices raise concerns that a bubble has formed and is about to burst, as it did in the United States in the mid-2000s. But with inflation and interest rates much lower in the 2010s, macroeconomic conditions have been more supportive of house prices in the Canadian context.

Also at the top of the second table are bets on overvaluation in two other sectors. Goldmoney Inc., formerly known as BitGold Inc., is a financial-technology company operating a gold-based platform offering financial and payment services, somewhat along the lines of bitcoin and other cryptocurrencies. The short position in the Horizons Marijuana Life Sciences exchange-traded fund likely reflects the view that the run-up in cannabis stocks is overvaluing the potential for growth in company earnings arising from the impending legalization of cannabis in Canada.

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