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After the COVID-19 pandemic caused the Toronto Stock Exchange to crash earlier this year, the market has since rallied 25 per cent. Is a new bull market starting up?

Short sellers don’t seem to think so. The short position in the iShares S&P/TSX 60 Index ETF remains historically high at 28.4 per cent of its float, according to data firm S3 Partners.

Companies with lofty valuations are currently a top target of short sellers. On the list are Shopify Inc., Alpha Pro Tech Ltd. and gold stocks, such as Barrick Gold Corp. But short sellers have taken profits in several stocks that tumbled during the crash, notably Royal Bank of Canada and other bank stocks.

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Stocks with large increases in short positions

At $1.7-billion, the increase in Shopify Inc.’s short position over the month to May 11 led all other companies. It was also the leader over the past three months, with a $2.2-billion increase in short sales.

Five largest one-month increases in short positions (as of May 11)

Company1-month change in short interest ($-mill)Short interest as % of float
Shopify Inc.SHOP-T$1,743.14.4%
Enbridge Inc.ENB-T$804.14.1%
Wheaton Precious Metals Corp.WPM-T$555.74.7%
Lululemon AthleticaLULU-Q$356.63.8%
Barrick Gold Corp.ABX-T$337.72.1%

Source: S3 Partners

U.S. trades are included for interlisted stocks (after converting to C$)

Shopify, a provider of e-commerce platforms to businesses, has an extremely rich valuation – especially for a company with negative cash flow. It recently surpassed Royal Bank of Canada to become the largest publicly traded company in Canada even though Royal Bank has more than 20 times the revenues and 400 times the assets – plus a profit of $13-billion in 2019.

Shopify Inc., Amazon.com Inc. and eBay Canada are currently supporting adoption of their online-sales platforms by providing businesses with cash advances, waiving fees and postponing loan payments. Still, short sellers seem to believe that Shopify’s transaction and subscription revenues will be impacted by COVID-19 cutting into the sales of online retailers and unleashing a wave of business bankruptcies.

Stocks with large decreases in short positions

There has long been talk that the financial sector in Canada will experience a world of pain when the “housing bubble” pops. More recently, there is talk of a wave of loan defaults arising from the crash in oil prices and standstill in commerce triggered by COVID-19.

However, Canadian bank stocks saw the biggest declines in short interest over the past month, with the Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank claiming the top three spots.

Short covering was also significant in terms of the percentage decrease from the previous month’s short position, particularly for Bank of Montreal (down 48.1 per cent) and Royal Bank (down 25.4 per cent).

Five largest one-month decreases in short positions (as of May 11)

Company1-month change in short interest ($-mill)Short interest as % of float
Bank of MontrealBMO-T-$740.561.8%
Royal Bank of CanadaRY-T-$432.441.0%
Toronto-Dominion BankTD-T-$341.893.2%
Fortis Inc.FTS-T-$309.753.0%
Emera Inc.EMA-T-$306.613.5%

Source: S3 Partners

U.S. trades are included for interlisted stocks (after converting to C$)

Many Canadian bank stocks tumbled close to 25 per cent during the crash earlier this year and have not recouped much of their fall. This short-seller retreat may perhaps reflect profit taking and the view that the much lower stock prices now discount a lot of the concern over huge loan-loss provisions.

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When TD Bank became on May 8 the first Canadian bank to announce a huge hike in loan loss provisions ($1.1 billion for U.S. retail operations), there was barely a ripple in the market. Setting aside reserves is an evolving situation, but for now short sellers don’t seem overly concerned.

Stocks with large short positions as a percentage of float

With 36 per cent of its float sold short, Alpha Pro Tech Ltd. has emerged as a prime target for short sellers. Adding to the bearish sentiment is the very high cost to borrow its shares, now over 45 per cent.

Alpha Pro supplies weather-resistant building products and protective apparel such as lab coats and proprietary face masks. Because of the latter product line, its stock has a history of more than quadrupling in value during viral outbreaks like Ebola in 2014 and then giving up the gains when the virus subsides. So far, it has given up about half of the upward spike realized during COVID-19.

Ten largest short positions as percentage of float (as of May 11)

CompanyShort interest as % of floatBorrow fee
Alpha Pro Tech Ltd.APT-A36.0%45.3%
iShares S&P/TSX 60 ETFXIU-T28.4%0.4%
Cronos Group Inc.CRON-T27.9%7.4%
Canopy Growth Corp.WEED-T25.9%14.4%
Westshore Terminals Corp.WTE-T21.5%0.3%
Aurora Cannabis Inc.ACB-T20.1%68.6%
Canada Goose HoldingsGOOS-T20.1%1.7%
Tilray Inc.TLRY-T19.8%108.8%
Aphria Inc.APHA-T18.8%99.8%
First Majestic Silver Corp.FR-T17.5%0.7%

Source: S3 Partners

Borrow fee is annualized to borrow shares for shorting; U.S. trades are included for interlisted stocks (after converting to C$)

Other notes

There have been concerns that COVID-19 might trigger corporate bankruptcies. The iShares Canadian Corporate Bond ETF (XCB-T) may be offering some confirmation. Its short position jumped 2,299-per-cent to $67.2 million over the three months ending May 11.

Bradley Safalow of independent research firm PAA Research maintains his bearish call on Canadian Tire Corp., as covered in this column a year ago. Among other things, he feels their e-commerce initiative will remain “woefully behind Amazon and Wal-Mart” until the dealer structure is addressed. Short interest rose 22 per cent in the past month, reaching 10.4 per cent of the float, according to S3 Partners.

Larry MacDonald is an author, journalist and economist at mccolumn@yahoo.com

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