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Short sellers ramped up their bets during the month ending Nov. 17, conveying a pessimistic view on the Toronto Stock Exchange’s direction.

According to data firm S3 Partners, the short position in the bellwether iShares S&P/TSX 60 ETF (XIU-T) leaped to 19.9 per cent of float, up from 13.8 per cent four weeks before. That seems to be a bold move, especially since it occurred while XIU was climbing to a gain of 3.9 per cent during the period.

At the company level, Air Canada continued to top the leader board for the largest of TSX short positions. The percentage of its float sold short was a humongous 39.2 per cent, far above the 27.2 per cent recorded last month.

Largest percentage of float sold short (Nov. 17)

Air CanadaAC-T39.2
Aurora Cannabis Inc.ACB-T20.0
iShares S&P/TSX 60 ETFXIU-T19.9
Canopy Growth Corp.WEED-T19.7
Lion Electric Co.LEV-T17.0
Briacell Therapeutics Corp.BCT-T16.7
Sundial Growers Inc.SNDL-Q15.5
Sprott Physical Uranium TrustU-UN-T15.4
Exco Technologies Ltd.XTC-T14.8
iShares S&P/TSX Energy ETFXEG-T13.7
Village Farms InternationalVFF-T13.2
Hexo Corp.HEXO-T13.0
Dirtt Environmental SolutionsDRT-T12.3
Morguard REITMRT-UN-T12.1
Ballard Power SystemsBLDP-T12.1
Tucows Inc.TC-T12.1
Great West Lifeco Inc.GWO-T11.7
Lithium Americas Corp.LAC-T11.5
Betapro Nat Gas 2x Daily Bull ETFHNU-T11.4

Source: S3 Partners

COVID travel restrictions are easing, and Air Canada has convertible debt in its capital structure, so short sellers may be engaging in arbitrage operations. However, new competition is emerging, such as low-cost carriers Lynx Air and Flair Airlines. Other considerations include soaring fuel costs, stagnation in business travel (likely related to adoption of virtual meetings) and rising rates this fall in COVID infections within Canada.

The cannabis sector is well represented on the table of companies with the most float sold short. Making appearances are Aurora Cannabis Inc., Canopy Growth Corp., Sundial Growers Inc., Village Farms International Inc. and Hexo Corp..

The United States seems to be inching toward relaxing restrictions on cannabis at the federal level – but earnings reports from cannabis companies have not helped. One big reason is the high levels of competition with other companies, the black market and home production.

Companies with high percentages of float short are candidates for short squeezes, especially those with share price gains greater than 50 per cent during the past three months. They are Lithium Americas Corp., Briacell Therapeutics Corp., Sprott Physical Uranium Trust and Meta Materials Inc..

A high days-to-cover ratio (number of shares short divided by average daily trading volumes) is another warning sign. For Air Canada, Dirtt Environmental Solutions Ltd., Great West Lifeco Inc. and Tucows Inc. this ratio was above 50. A high cost to borrow shares is another metric to watch, but only Briacell Therapeutics was above a lending rate of 10 per cent.

Largest one-month increases in short sales (Nov. 17)

Shopify Inc.SHOP-T$1,722.7
iShares S&P/TSX 60 ETFXIU-T$890.4
CP RailwayCP-T$849.1
iShares Core S&P/TSXXIC-T$830.2
Wheaton Precious MetalsWPM-T$383.8
Toronto-Dominion BankTD-T$367.6
Tilray Inc.TLRY-T$300.8
Telus Corp.T-T$254.8
Canopy Growth Corp.WEED-T$204.6
CN RailwayCNR-T$202.5
Barrick Gold Corp.ABX-T$201.2
National Bank of CanadaNA-T$198.3
Suncor EnergySU-T$195.9
Shaw Communications Inc.SJR.B-T$191.5
Enbridge Inc.ENB-T$183.6
Sun Life FinancialSLF-T$174.3
Brookfield Asset ManagementBAM.A-T$167.5
Lululemon AthleticaLULU-Q$167.3
Bank of MontrealBMO-T$145.0
BCE Inc.BCE-T$97.3

Source: S3 Partners

Changes and trends in short positions also can be informative. In the accompanying table listing the largest one-month increases in the dollar value of short positions, Shopify Inc. leads the way with a rise of $1.7 billion during the month.

Shopify benefited from COVID lockdowns as people isolating from the office and elsewhere others flocked to the Internet and did things like using its platform to start an online business. But now that COVID seems to be waning, many of the firms benefiting from COVID have seen their stocks turn down. Shopify shares have held up well so far, but the rising short position shows bearish sentiment is accumulating.

Update on short-selling studies in peer-reviewed journals

It’s been a while since the Short sales on the TSX column reviewed studies by university professors and other researchers on short selling. They often have useful insights for investors, so let’s provide some of the highlights.

Studies over the years have found that short sellers on average demonstrate an ability to anticipate bad news. But do they acquire their informational edge from superior analysis of public data or from private channels? In a forthcoming study to be published in The Accounting Review Journal, professors Greg Clinch and Wei Li conclude that when it comes to anticipating company earnings, short sellers generally trade on private information.

Most studies of the predictive power of short selling focus on the U. S. market. A recent paper by Monash University researcher Arseny Gorbenko, Do Short Sellers Anticipate Future Market Returns? International Evidence, investigates if the predictive power also holds up in other countries – and found this to be the case in the majority of countries.

Desislava Vladimirova and two other researchers released an Oct. 8, 2021 paper, The Impact of Short Selling in the Cross-Section of Corporate Bond Returns, that finds short selling of corporate bonds can signal company underperformance. Even better signals are generated by the combination of equity and bond short selling.

In past studies, financial scholars have found that short sellers provide disincentives for executives to inflate earnings reports through aggressive accounting techniques. Huimin Chen and Qiang Wu report in a recent issue of the Advances in Accounting journal that short selling also generates disincentives for executives to use operational changes – such as overproducing to lower unit costs – for the purpose of gilding earnings reports.

Larry MacDonald blogs at Investing Journey.

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