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For this mid-October update on short sales, let’s look at 14 Canadian companies heavily targeted by short sellers. If you own shares in any of these 14 companies, you might want to double-check your bullish thesis. If you do any short selling, they might be ideas to explore.

The first table shows the 5 companies with the highest percentage of float sold short. As has been true for several months now, the table is dominated by cannabis firms. This month they are: Tilray Inc., Cronos Group Inc. and Village Farms International Inc. Reinforcing the bearish signal for these companies is the high costs to borrow their shares for selling short.

Top 5 stocks with the highest % of float sold short (as of Oct. 17)

Short interest as a % of floatBorrow fee
Tilray Inc.TLRY-Q35.9%60.8%
Cronos Group Inc.CRON-T24.9%6.6%
DHX Media Ltd.DHX -T23.1%9.8%
Village Farms International Inc.VFF-T22.7%19.4%
Canada Goose Holdings Inc.GOOS-T22.4%0.7%

Source: S3 Partners

A newcomer to the table this month is DHX Media Ltd., a media production, distribution and broadcasting company focused on children’s programming. They took on a lot of debt to finance a series of acquisitions, but cash flows haven’t come through as expected. They also lost Disney as core client and now the latter is launching a competing streaming service.

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While a high percentage of float short tends to foreshadow underperformance in a stock price, sometimes it can trigger a short squeeze (the price of a stock spikes upward when short sellers rush to buy back borrowed shares to return them to the owners). One way to assess this risk is to check if insider buying is high (using INK Research reports).

Only DHX Media had insider buying. However, it wasn’t overly large, occurred 7 to 12 months ago and the stock price been slipping since. The other companies had noteworthy insider selling over the past 12 months, more than $20-million worth in the cases of Tilray and Canada Goose Holdings Inc.

The next table shows 5 companies with the largest short positions by dollar value. It screens out companies with less than 5 per cent of float short because a large short position by dollar value by itself may just reflect a large number of shares trading rather than bearish sentiment.

Top 5 stocks with the largest short interest and more than 5% of float sold short

Short interest ($ millions)Short interest as a % of float
Pembina Pipeline Corp.PPL-T $1,431.2 6.0%
Canopy Growth Corp.WEED-T $1,317.0 21.0%
Great-West Lifeco Inc.GWO-T $944.0 13.2%
Loblaw Companies Ltd.L-T $913.1 7.2%
Aurora Cannabis Inc.ACB-T $878.5 18.1%

Source: S3 Partners

Pembina Pipeline Corp. benefits from lower interest rates because pipeline companies carry large debt loads. The 5-per-cent dividend is well covered on a net earnings basis but not on a cash-flow basis. Management recently acquired the Kinder Morgan Canada pipeline and section of a U.S. pipeline, both of which offer opportunities for organic growth but may trigger the issuance of several billion dollars of equity and debt. The short position could also be linked to arbitraging of the company’s convertible securities and/or the Kinder Morgan merger.

Canopy Growth Corp. and Aurora Cannabis Inc. are two of Canada’s largest cannabis companies. Until a few months ago, the sector was in the grips of a mania fueled by growth prospects. But as reality settles in, the astronomical valuations seem to be falling back to earth.

Great-West Lifeco Inc. pays a dividend over 5 per cent. However, insurance companies are challenged by low interest rates on their bond portfolios. There also seems to be some issues with their acquisition of Boston-based Putnam Funds. Convertible preferred shares on its balance sheet may be the source of arbitrage short sales.

Loblaw Companies Ltd. is Canada’s leading grocer by sales. However, competition is fierce from Wal-Mart, Costco, and Amazon. Loblaw has real estate assets that can be monetized to bolster the balance sheet. Insider ownership is high.

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The next table shows the top 5 companies with the largest 3-month increase in short interest. Companies with less than 5 per cent of float sold short are screened out to make sure a large 3-month increase is more likely a bearish signal than simply a reflection of a large number of outstanding shares.

Top 5 stocks with largest increases in short sales and more than 5% of float short

3-month increase in short interest ($ millions)Short interest ($ millions)Short interest as a % of float
Pembina Pipeline Corp.PPL-T$337.4$1,432.06.0%
Encana Corp.ECA-T$142.9$494.37.0%
Stars Group Inc.TSGI-T$134.8$653.411.1%
Pan American Silver Corp.PAAS-T$111.7$304.37.2%
First Majestic Silver Corp.FR-T$98.6$369.617.1%

Source: S3 Partners

Encana Corp.’s stock has faded considerably in recent years, dragged down by ill-timed acquisitions and a huge discount in Canadian natural gas prices. Valuation is rock bottom, about 0.6 times book value, although cost cutting has generated positive cash flow on prime assets.

Stars Group Inc. provides online gambling services, which analysts say has considerable growth potential. The stock is trading below book value in large part because of an acquisition in which a lot of debt was taken on.

First Majestic Silver Corp. and Pan American Silver Corp. are silver producers in Latin American countries. With precious metals prices well supported by low interest rates, monetary easing and geopolitical risks, the short positions appear to be part of pairs trades where the offsetting long position is on silver producers with higher quality assets.

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