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Short sellers continued to concentrate their fire on Canadian cannabis and financial companies this past month.

The bears have been quite successful with cannabis stocks, reaping bountiful profits from the free fall in their prices since the first quarter of the year. But banks and other financial intermediaries have traded up in 2019 and are inflicting losses on the shorts.

Cannabis stocks

Short selling has been especially significant in the case of cannabis companies. The latter group dominated the accompanying table of the 10 companies with the highest percentage of float sold short as of Sept. 20 – with Tilray Inc., Cronos Group Inc., Canopy Growth Corp. and Hexo Corp. claiming four of the spots.

The four not only had high percentages of float sold short, but also very high costs to borrow their shares (short sales are done with borrowed shares). If there had been a greater supply of loanable shares, short sellers would have likely had even bigger short positions in place.

Top 10 companies: highest percentage of shares short (as of Sept 20, 2019)

CompanyTicker% of float sold short*Borrow fee (annualized)**
Tilray Inc.TLRY-Q37.7%70.4%
Cronos Group Inc.CRON-T25.4%7.1%
Canada Goose HoldingsGOOS-T23.7%0.8%
Genworth MI Canada Inc.MIC-T22.3%0.8%
Canopy Growth Corp.WEED-T22.2%38.6%
Home Capital Group Inc.HCG-T18.0%1.6%
Tucows Inc.TC-T17.5%1.6%
Hexo Corp.HEXO-T17.1%33.4%
Westshore Terminals Corp.WTE-T17.0%0.3%
First Majestic Silver Corp.FR-T16.5%1.3%

Source: S3 Partners  

For interlisted stocks, U.S. trades are included in the calculations (after converting to C$). *Per cent of float sold short is based on: number of shares short/number of shares available for trading. **Borrow fee = annualized cost to borrow shares dividends excluded

The bet against Tilray, headquartered in Nanaimo, B.C., is the largest of all. With 37.7 per cent of its float sold short and the annualized fee to borrow its shares of 70.4 per cent, Tilray is way ahead of the pack. Its shares are down about 90 per cent from their peak a year ago.

Another indication that cannabis stocks have been a very profitable trade for the short sellers: Horizons Marijuana Life Sciences Index ETF is down nearly 50 per cent over the past six months.

Financial stocks

In August, Steve Eisman of Neuberger Berman LLC appeared on BNN Bloomberg to confirm he was still short a number of Canadian financial stocks. When Mr. Eisman speaks, people usually listen. After all, he made a huge pile of money from his short positions on U.S. banks during the 2008 meltdown.

Except this time, people didn’t seem to be interested. Instead of selling off after he spoke, Canadian financial stocks rallied. In fact, the iShares S&P/TSX Capped Financials ETF climbed to a new high by mid-September, registering a 15-per-cent gain on a year-to-date basis.

There are several explanations for the bullish sentiment. One is that an economic slowdown is not necessarily something to worry about when the absence of global inflation allows central banks to maintain monetary easing and support economic expansion.

But short sellers can be a persistent lot. As the recent rally in financial stocks unfolded, short sales of bank stocks still went up, according to data from S3 Partners.

For the Big Five chartered banks, Bank of Nova Scotia had a jump of $437.8-million in short interest over the month ended Sept. 20, the highest of the group. The biggest percentage increase was 17.9 per cent, for CIBC. However, the banks still have a low percentage of their floats sold short. CIBC was slightly above 5 per cent while the other four were well under this threshold, with Royal Bank the lowest at 1.1 per cent.

Increases in short positions of the Big Five Canadian banks (over the month to Sept. 20, 2019)

BankTickerIncrease in short position over the month to Sept 20 ($-mill)Total short interest as of Sept. 20 ($-bill)Increase in dollar value of short positionPercentage of float sold short (based on dollar values)
Bank of Nova ScotiaBNS-T437.83.215.6%3.5%
Toronto-Dominion BankTD-T369.14.49.2%3.2%
Royal Bank of CanadaRY-T192.71.713.1%1.1%
Bank of MontrealBMO-T143.91.510.6%2.4%

Source: S3 Partners

For interlisted stocks, U.S. trades are included in the calculations (after converting to C$)

Canadian Tire

Mr. Eisman also announced in August a new short position: Canadian Tire Corp. He joins PAA Research CEO Bradley Safalow in the bearish camp. They both argue that the retailer’s margins will be pressured by competition from Inc. and its large credit-card portfolio poses the same risks the banks face, namely an escalation in loan-loss provisions.

However, the trend in short interest over the past year for Canadian Tire presents a mixed picture. As can be seen in the following chart, there was a rather steep rise from 2 per cent of the float short in October, 2018, to 7.6 per cent by the end of January of 2019. Since then the trend has levelled off at a lower plateau, even dropping substantially in recent weeks.

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