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For the month ending Dec.16, bearish bets on the direction of the Toronto Stock Exchange (TSX) continued to trend upward. As proxied by short interest in the iShares S&P/TSX 60 ETF (XIU-T), they stood at $2.3-billion versus $2.2-billion last month and $1-billion three months ago, according to data-analytics firm S3 Partners. This month’s short position was 21 per cent of XIU’s float, compared to 19.9 per cent last month and 9.3 per cent three months ago.

At the company level, Air Canada (AC-T) once again topped the list of the largest of short positions. Short selling of its stock came in at 32.4 per cent of float, still high but a lot lower than November’s reading. The factors that may account for this elevated position were discussed in previous updates.

The top 20 percentage of float sold short (as of Dec. 16)

Air CanadaAC-T32.3%
iShares S&P/TSX Cap Energy ETFXEG-T24.1%
Canopy Growth Corp.WEED-T22.0%
iShares S&P/TSX 60 ETFXIU-T21.0%
Hexo Corp.HEXO-T18.7%
Aurora Cannabis Inc.ACB-T18.6%
Lion Electric Co.LEV-T17.4%
Alpha Pro Tech Ltd.APT-A16.2%
Sundial Growers Inc.SNDL-Q15.7%
Meta Materials Inc.MMAT-Q15.3%
Exco Technologies Ltd.XTC-T14.3%
Village Farms InternationalVFF-T14.2%
Dirtt Environmental SolutionsDRT-T14.0%
Briacell Therapeutics Corp.BCT-T13.5%
CI Galaxy Ethereum ETFETHX-B-T13.1%
Morguard REITMRT-UN-T12.6%
Ballard Power SystemsBLDP-T12.5%
Energy Fuels Inc.EFR-T12.4%
Tilray Inc.TLRY-Q12.2%
Cineplex Inc.CGX-T12.0%

Source: S3 Partners

The iShares S&P/TSX Energy ETF (XEG-T) leaped into second spot with 24.1 per cent of float short. Last month, this figure was 13.7 per cent, so bearish sentiment has increased markedly. U.S. President Joe Biden has been pressuring OPEC to lower prices, new COVID variants are expected to curtail travel, and escalating inflation is seen as a trigger for central banks to start raising rates to cool off the economy.

Cannabis producer Hexo Corp. (HEXO-T) also had a big jump, rising to 18.7 per cent of float short from 13 per cent. The company, whose rise from basement office to billion–dollar market capitalization was chronicled in the book Billion Dollar Start-Up, reported a net loss of $117 million for the quarter ending Oct. 31; another loss of that magnitude would push total losses above a billion dollars for the past five years. The Globe’s Vanmala Subramaniam also reports that Hexo is in violation of a covenant on its convertible debt.

The cannabis sector is again well represented on the table of companies with the most float short. In addition to Hexo, appearances were made by: Canopy Growth Corp. (WEED-T), Aurora Cannabis Inc. (ACB-T), Sundial Growers Inc. (SNDL-Q), Village Farms International Inc. (VFF-T) and Tilray Corp. (TLRY-T). Legalizing cannabis may have created a new market opportunity but it also unleashed a multitude of firms competing against each other, home production and the black market.

The Galaxy Ethereum ETF has climbed onto the top 20 list. More than half of the two dozen cryptocurrency ETFs trading in Canada are down 15 to 20 per cent over the past month. Could the current dip see a recovery as past trends suggest? Perhaps, but this time around there is a string of statements from U.S. regulators and politicians about investigations underway and restrictions to be announced.

Alpha Pro Tech’s short position shot up to 16.2 per cent of float. The maker of masks and other pandemic-related equipment has been a rewarding play for short sellers after vaccines were introduced. There was however a 25 per cent spike in its stock price on news of an outbreak of the Omicron variant. But short sellers seem to think these fears are overblown.

Companies with high percentages of float sold short are candidates for short squeezes, especially those with significant share price gains. If we take a price increase greater than 20 per cent over the past three months as signal, then none of the heavily shorted companies qualify as short squeeze risks. The highest price increase was 17.6 per cent for iShares S&P/TSX Cap Energy ETF.

A high days-to-cover ratio (number of shares short divided by average daily trading volumes) is another warning sign of a squeeze. This ratio was above 50 for Air Canada, Dirtt Environmental Solutions Ltd. (DRT-T) and Cineplex Inc. (CGX-T), although their high short positions may be more of a reflection of convertible-debenture arbitrage. The cost to borrow shares is yet another metric to watch: shares of Briacell Therapeutics Corp. (BCT-X), Sundial Growers Inc. and CI Galaxy Ethereum ETF (ETHX-U-T) cost short sellers more than 10 per cent to borrow.

Another way to analyze short positions is by rates of change. The accompanying table shows the 10 largest changes in the dollar value of short positions over the month to Dec. 16.

The 10 largest one-month increases in short sales (as of Dec. 16)

Royal Bank of CanadaRY-T794.1
CP RailwayCP-T716.1
Manulife FinancialMFC-T512.6
TC Energy Corp.TRP-T186.4
BCE Inc.BCE-T167.1
Nutrien Ltd.NTR-T154.8
Bank of MontrealBMO-T130.1
Shaw Communications Inc. BSJR-B-T127.6
iShares Canadian Corporate Bond ETFXCB-T122.2
Boardwalk REITBEI-UN-T100.2

Source: S3 Partners

Stocks with noteworthy bearish sentiment can be found not only in rankings but also among the holdings of hedge funds or the sell recommendations of investment research firms. For this month, let’s shine the spotlight on Veritas Investment Research, which issues independent buy and sell recommendations, and is twinned with Veritas Asset Management, a manager of long-only and long-short investment funds.

They have been bearish on the overvaluation of renewable energy companies relative to energy companies pivoting from fossil fuels to renewable energy. A prime example is their sell recommendation on TransAlta Renewables Inc. (RNW-T) and buy recommendation on TransAlta Corp. (TA-T).

“Coal, oil and gas producers are out of favour with investors that have embraced the ESG movement,” said Sam La Bell, a partner and director at Veritas Investment Research. “Yet, many are transitioning to renewables and have strong cash flows; moreover, wind, solar and other renewable energy companies have production risks because the wind doesn’t always blow and the sun doesn’t always shine.”

Larry MacDonald is a retired economist who blogs at Investing Journey

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