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Total short sales on the Toronto Stock Exchange edged down 1.8 per cent during the first week of April, according to data-analytics firm S3 Partners.

With stock-market indexes up more than 20 per cent since mid-March, short sellers appear to be covering some of their bets.

S3 Partners also provides the top monthly changes in short positions for Canadian companies.

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The 5 largest increases in short interest for the month ending April 9

Company1-month change in short interest ($-mill)Short interest as % of float
BCE Inc.BCE-T$785.56.1%
Franco-Nevada Corp.FNV-T$318.46.0%
Rogers Communications Inc.RCI-B-T$230.32.6%
Wheaton Precious Metals Corp.WPM-T$136.84.0%
Brookfield Asset ManagementBAM-A-T$130.61.5%

The 5 largest decreases in short interest for the month ending April 9

Company1-month change in short interest ($-mill)Short interest as % of float
Enbridge Inc.ENB-T-$1,971.24.6%
Toronto-Dominion BankTD-T-$906.33.7%
Canopy Growth Corp.WEED-T-$817.925.9%
TC Energy Corp.TRP-T-$807.44.7%
Bank of MontrealBMO-T-$615.32.6%

Source: S3 Partners

Among the top 5 increases in short interest are two telecommunication firms, BCE Inc. and Rogers Communications. They are solid companies with attractive dividends, and their shares hold up well during weak markets. But they lag in strong markets, regulators are pushing for lower wireless rates and management will need to spend a lot on rolling out 5G networks.

Among the top 5 decreases in short interest are two banks, Toronto-Dominion Bank and Bank of Montreal. This could signal that the market is not worried, at least at this time, about the coronavirus pandemic precipitating a downturn that fuels a worrisome uptrend in underperforming loans and mortgages.

Activist short sellers

Activist short sellers take short positions in the shares of targeted companies and publicize bearish views through research reports, media interviews and social media.

According to financial data firm Breakout Point, activist short sellers initiated campaigns against four Canadian companies in the first quarter.

Nymox Pharmaceutical Corp. was targeted by Night Market Research. PharmaCielo Ltd. and NexTech AR Solutions Corp. and Cineplex Inc. were targeted by Hindenburg Research.

The short position in Cineplex was initiated on the premise Cineworld Group’s takeover bid for Cineplex would be withdrawn or revised downward. The impact of the coronavirus on theater attendance doesn’t help either.

Since the short calls were made, declines have occurred in the shares of Nymox (down 30 per cent), Cineplex (down 58 per cent), PharmaCielo (down 50 per cent) and NexTech (down 15 per cent). Short sellers were expecting a decline of 20 per cent in Cineplex and declines of 98 per cent to 100 per cent for the other three.

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Cost to borrow

When many of a company’s shares are not available to borrow to sell short, bearish sentiment will show up more in the cost to borrow shares than in the size of short position. The following table, based on data from Interactive Brokers, lists the 10 Canadian companies with the most expensive shares to borrow, as of April 1.

Interestingly, Advanz Pharma Corp. is on the list.

It is the former Concordia International Corp., which went off the rails a few years ago as a result of a debt-fuelled campaign to acquire off-patent drugs and hike their prices. Is its turnaround turning out to be a challenge?

The 10 most expensive shares to borrow (as of April 1)

CompanyBorrow fee (annualized)
Titan Medical Inc.TMD-T136.8%
Neptune Wellness Solutions Inc.NEPT-T113.2%
Electrovaya Inc.EFL-T101.7%
Cathedral Energy Services Ltd.CET-T83.7%
Advanz Pharma Corp Ltd.ADVZ-T71.1%
Platinum Group Metals Ltd.PTM-T65.6%
Hexo Corp.HEXO-T58.6%
Resverlogix Corp.RVX-T57.3%
Oncolytics Biotech Inc.ONC-T56.8%
Ballard Power Systems Inc.BLDP-T56.4%

Source: Interactive Brokers

If you own any stocks with high borrow rates, it may be worth requesting a split of the loan payments that your broker receives for lending out your shares. Not all of them will accommodate but some, such as Interactive Brokers, will do so.

Substantial loan fees can be earned over extended periods. For example, many of the companies on the top-ten table had high lending costs as far back as early 2018, including: Titan Medical (88.6 per cent), Electrovaya (73.2 per cent), Cathedral Energy (75.8 per cent), Resverlogix (35.5 per cent) and Ballard Power (45.2 per cent).

Sell recommendations from independent research firms

Independent research firms that specialize in uncovering creative accounting can issue company reports just as bearish as those of activist short sellers.

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Of note this month are the reports issued by Bucephalus Research on Bombardier Inc.

With the agreement to sell Bombardier’s railway division scheduled to close in a year, Bucephalus believes the buyer, Alstom SA, will take advantage of conditional clauses to push for a sizable reduction in price. This could leave Bombardier short of funds to meet debt obligations due in 2021.

Insider trades and short sales

Insiders at Aurora Cannabis Inc. dumped more than 20-million shares near the bottom of the stock market sell-off in March. Insider selling on a downtrend in stock price is not usually a good omen, particularly when the company has one of the highest short positions and costs to borrow shares: in March, 19.9 per cent of the float was sold short and the cost to borrow was 49.2 per cent.

Larry MacDonald is an author, journalist and economist. He can be reached at mccolumn@yahoo.com

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