Academic research has found that short-sellers are “informed traders who predict future bad news, negative earnings surprises and downward revisions in analyst earnings forecasts,” to quote Professor Ferhat Akbas and his co-authors of a 2013 paper, Short Interest, Returns, and Fundamentals.
Therefore, if you own shares in any of the following heavily shorted Canadian companies, perhaps you may want to double-check your bullish hypothesis. Or, if you are into short-selling, perhaps these present an idea or two to investigate.
The first table lists the 10 companies with the highest percentage of their float sold short, as of Dec. 17. Financial-analytics firm S3 Partners has provided the data for the tables in this article.
The majority of companies in the table have carried over from the past month, with the cannabis sector again claiming half the spots. The composition and ranking of the cannabis firms has changed somewhat to Cronos Group Inc., Tilray Inc., Canopy Growth Corp., Aurora Cannabis Inc. and Hexo Corp.
Tucows Inc. has been one of the more regular inclusions on the table. It also has been targeted in research reports by activist short-sellers, notably Copperfield Research in 2018 and Kerrisdale Capital Management in June of 2019. The bearish thesis is that Tucows will be challenged by the transition from its legacy domain-registry and mobile-phone businesses to its new business in the fibre-optics sector. Tucows’s share price has been volatile but is currently trading close to its level from two years ago.
One of the newcomers on the table is the iShares S&P/TSX Capped Energy ETF, with 17.7 per cent of its float short. The gloomy sentiment in the oil-and-gas sector still lingers as it deals with a perfect storm of low-carbon policies, adoption of electric vehicles, sluggish rates of economic growth, increased natural-gas supplies from fracking firms and delays in rolling out new pipelines.
Absent from the table is the iShares S&P/TSX 60 Index ETF. It made the table last month with 20.9 per cent of its float short, but that proportion has fallen to 16 per cent. Given this fall’s resumption of the 10-year bull market in stocks, it would seem some short-sellers have gone into capitulation mode.
The next two tables show companies with the largest short positions and three-month change by dollar value. They screen out companies with less than 5 per cent of float short because a large short interest by itself may simply reflect a large number of shares trading, not necessarily bearish sentiment.
One of Canada’s Big Five chartered banks, CIBC, shows up on both tables. For many years now, short-sellers have targeted the Canadian banks, believing that a tumble in housing prices was on the way, which would trigger a jump in loan-loss provisions. CIBC attracts more than its share of short-selling due to its greater exposure to the domestic economy.
Short squeezes
Occasionally, a large short position may spark a short squeeze (an upward spike in the price of a stock, caused by short-sellers rushing to buy back the shares they borrowed). A way to assess this possibility is to check insider trading (source: INK Research); if executives and directors are buying shares, a squeeze could be more of a likelihood.
As it turns out, only one of the firms, Bonterra Energy, saw significant insider buying. The chief executive officer purchased $2.2-million worth of stock during the past year (with no offsetting sales by other insiders). The stocks with the largest short positions and three-month increases (by dollar value) shouldn’t be at too much risk of a squeeze given that the percentage of their float short is not inordinately high (Canopy Growth excepted).
Convertible securities
A short position may overstate bearish sentiment if it is to hedge, in part or whole, a long position in a convertible debenture or other such security issued by the company. This could be the case in the cannabis sector, where several firms do have convertible securities in their capital structure – although the generous conversion features and dilution potential could incentivize bearish, as opposed to hedging, short positions. Northland Power has a convertible bond, but it is a small one.