For this monthly update on short sales, well over a dozen heavily shorted Canadian companies are presented. If you own shares in any of these companies, you may want to make sure your due diligence is sound. Or if you are a short seller, perhaps there is an idea or two to pursue.
Let’s begin with a table listing the 10 companies that have the highest percentage of their float sold short. Financial-analytics firm S3 Partners provided the data (as of Nov. 18, 2019) for the tables in this article.
Cannabis stocks aplenty
Once again, cannabis stocks dominate the table. Half of the entries are taken by Tilray, Cronos Group, Canopy Growth, Village Farms and Aurora Cannabis.
Recent quarterly earnings reports in the sector were dismal but one refrain was that misses on earnings and revenue projections had a lot to do with the slow roll out of retail outlets. As this bottleneck clears up, quarterly company reports could become more positive.
However, cannabis companies are trying to get big fast via acquisitions and capital expenditures, so more stock issuance could be in store given the dearth of earnings. This dilutes shareholders and gives short sellers incentives to place bets, resulting in downward pressures on stock prices.
Cannabis firms – including Canopy, Aurora Cannabis and Tilray – have also issued convertible debentures and notes. In some cases, the interest payments exceed the annual earnings of issuers – an example being Tilray’s huge offering of convertibles in the fall of 2018.
According to news reports, some convertible bonds are also being offered with conversions on a fixed-value basis. Fixed-value conversions require issuing increasingly large quantities of shares to preserve the value of a convertible bond holder’s equity whenever stock prices are declining. This can give rise to substantial dilution, and creates an incentive to short sell the issuer’s stock.
A relative newcomer to the table is Canada Goose Holdings, maker of iconic, high-end winter coats. Short interest now stands at 30.5 per cent of the float, up from 19.2 per cent in July. There is no convertible debt on the balance sheet.
Short sellers have been concerned that the company’s rich valuation and ability to beat earnings estimates were at risk due to a slowdown in the Chinese economy – and a trade war with the United States. On the positive side, the company is diversifying its product offerings, and its expansion into China and other foreign markets is still in the early stages.
iShares S&P/TSX 60 Index ETF
Another newcomer to the table is not a company but an exchange-traded fund (ETF): the iShares S&P/TSX 60 Index ETF (ticker: XIU). Previously, the tables focused on individual stocks but as of this month, ETFs will be included because of their information value.
In particular, the short position in XIU may give some hints on what direction the stock market is heading, and perhaps even the likelihood of a bear market. On this basis, there may be some concern: XIU currently has 20.6 per cent of its float sold short, compared to 12.5 per cent at the beginning of 2019.
A high percentage of float short tends to foreshadow stock underperformance, according to academic studies. But it sometimes can trigger a short squeeze (price of a stock spikes upward when short sellers rush to buy back borrowed shares so they can be returned to the owners).
One way to assess this risk is to look at insider trading over the past year (with the help of data from INK Research). As it turns out, all ten companies had net insider selling, ranging from $0.5 million for Vermilion Energy to $48.0 million for Canopy. But don’t get complacent: short squeezes can still occur if some good news unexpectedly surfaces.
Two more tables
The next two tables show companies with the largest short positions and the largest 3-month change in short positions, respectively. They screen out companies with less than 4.5 per cent of float short because a large short position by itself may simply reflect a large number of shares trading, not necessarily noteworthy bearish sentiment.
It is interesting to see Shopify Inc. on the table of companies with the largest short interest (Shopify appears to not have any convertible debt). Could this be a hint that the critiques of Shopify by activist short-seller, Andrew Left of Citron Research be ultimately proven right?