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Most investors are proud to say they hold only high-quality companies in their portfolio. But it has been low-quality stocks exploding higher in recent weeks. Returns on stocks with the biggest short positions – generally, weaker companies where sophisticated investors are betting on a share price decline – are racing ahead of benchmark performance, potentially indicative of a new market cycle.

The freakish volatility caused by the social media-led short squeeze on GameStop Corp. highlights one of the worst market environments for shorting stocks in the past 30 years, according to Bank of Nova Scotia strategist Jean-Michel Gauthier.

The trend of short investors losing heaps of money as their stocks rally goes far beyond GameStop Corp., AMC Entertainment Holdings Inc. and other stocks recently dominating the headlines. The pattern has reached deeply into Canadian markets.

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The accompanying table shows the recent performance of Canadian companies with the highest short positions as measured by short interest as a percentage of total stock float. I say Canadian “companies,” not Canadian “stocks,” purposely here because Mr. Gauthier points out something very important in compiling these numbers. Namely, that in many cases, the vast majority of short positions on Canadian companies are executed in U.S. markets, and this practice includes domestic hedge fund managers.

Canadian companies with the highest short positions

NameTickerShort Int. as % of Float 1M Ttl. Rtn. (%)3M Ttl. Rtn. (%)12M Ttl. Rtn. (%)
S&P/TSX Composite2.814.76.7
First Majestic SilverFR-T25.425.753.060.9
Westshore Term. Inv.WTE-T22.09.022.510.3
Aurora CannabisACB-T21.553.8160.8-45.7
Cronos GroupCRON-T19.164.183.052.3
Canada Goose Hldgs.GOOS-T18.918.27.912.9
Canopy GrowthWEED-T18.871.393.580.0
West Fraser TimberWFG-T12.43.029.061.5
BlackBerryBB-T11.475.1149.783.4
Trillium Thera.TRIL-T10.9-13.7-1.9218.3
Great-West LifecoGWO-T10.9-2.19.5-7.6
AphriaAPHA-T10.1118.2188.7210.2
Fortuna Silver MinesFVI-T9.8-6.07.589.4
Boardwalk REITBEI-UN-T9.54.731.9-22.8
Dream Office REITD-UN-T8.7-1.910.5-37.6
Loblaw Cos.L-T8.7-0.1-4.8-7.6
Canadian TireCTC-A-T8.54.017.726.1
Laurentian BankLB-T8.10.218.1-22.5
Imperial OilIMO-T7.50.232.1-19.9
Arc ResourcesARX-T7.19.3-0.7-2.1
Vermilion EnergyVET-T7.13.972.5-67.7
Seabridge GoldSEA-T6.9-8.1-6.033.2
Ballard Power Sys.BLDP-T6.956.7130.4258.3
Great Cdn. GamingGC-T6.5-2.081.47.0
Bausch Health Cos.BHC-T6.430.650.5-5.0
InnergexINE-T6.44.517.757.2

Source: Bloomberg,  Scotiabank GBM Portfolio Strategy 

The most shorted Canadian company, First Majestic Silver Corp. , is a good example of cross border shorting. For the domestically listed First Majestic Silver stock, the short interest is 4.1 million shares, a small percentage of the total float of 197.2 million shares. In the United States, however, there are a whopping 46 million shares sold short.

The situation with Aurora Cannabis Inc. is similar – there are 33.2 million shares of the U.S.-listed stock sold short, compared with 5.9 million shares of the Canadian-listed stock, according to Bloomberg.

Highly shorted Canadian companies have performed extremely well no matter where the negative bets have taken place. The table shows that Canada’s most shorted company, First Majestic Silver, has jumped 53 per cent in the past three months and 25.7 per cent in the past month alone.

Returns have been even better for heavily shorted cannabis stocks. Aurora Cannabis has soared 160.8 per cent in the past three months and Canopy Growth Corp. is up 93.5 per cent for the same period. Outside of cannabis, BlackBerry Ltd. has also punished shorts, climbing nearly 150 per cent over three months.

The average returns for the 10 most shorted Canadian companies are impressive – 30.5 per cent for the past month (to Tuesday’s close), 60.7 per cent for the past three months and 52.6 per cent in the past 12 months. This compares with the S&P/TSX Composite’s 2.8 per cent, 14.7 per cent and 6.7 per cent, respectively.

Please note that the short interest data on the table, calculated by Scotiabank, are as of Jan. 15. Given all the hoopla surrounding short covering lately, it is important for investors to be aware that short interest data are always delayed, subject to biweekly corporate filings.

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Mr. Gauthier wrote that there are two market environments where highly shorted stocks outperform. One is a speculative frenzy, like 1998-2000, just ahead of the deflation of a large asset bubble. This interpretation is, of course, a bearish one for investors.

However, the other scenario where shorted stocks jump en masse is the end of a bear market or coming out of a recession, and the beginning of a new market cycle and a sustainable equity rally. This perspective is exceedingly bullish for investors.

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