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Short sellers became less bearish on the general direction of Canadian stocks during the stock-market rally in April and May. But they came howling back in June as market valuations approached historical highs and the COVID-19 virus re-accelerated in parts of the United States.

The shift in sentiment is highlighted by the jump in the short position in the iShares S&P/TSX 60 Index ETF (XIU-T). The number of XIU’s shares sold short climbed sharply in recent weeks to stand at 119.1 million as of June 22. This reading surpasses the peak established three months ago near the height of the COVID-19 scare. It also means that 32.9 per cent of XIU’s float is sold short, an historic high.

Source: Investment Industry Regulatory Organization of CanadaThe Globe and Mail

At the company level, data from analytics firm S3 Partners show that many richly valued stocks are short sellers’ top targets. They include Barrick Gold Corp., Shopify Inc., Lululemon Athletica Inc. and Alpha Pro Tech Ltd. Also attracting big short interest are companies struggling to be profitable, such as cannabis producers Canopy Growth Corp. and Cronos Group Inc. But short positions are declining elsewhere. Two notable cases are Royal Bank of Canada and the iShares S&P/TSX Financials ETF.

The five largest three-month increases in short interest (June 22)

Company3-month change in short interest ($-mill)% increase in short positionShort interest as of June 22 ($-mill)Short interest as % of float
Barrick Gold Corp.ABX-T$1,454142.8%$2,4724.3%
Shopify Inc.SHOP-T$1,15061.9%$3,0072.3%
Lululemon AthleticaLULU-Q$1,076172.6%$1,6993.5%
iShares S&P/TSX 60 ETFXIU-T$75837.0%$2,80732.9%
Canadian Imperial Bank of CommerceCM-T$58329.9%$2,5306.1%

Source: S3 Partners

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

The five largest short positions as percentage of float (June 22)

CompanyShort interest as % of floatBorrow fee
Alpha Pro Tech Ltd.APT-A35.1%52.3%
iShares S&P/TSX 60 ETFXIU-T32.9%0.4%
Cronos GroupCRON-T30.1%6.8%
Canopy Growth Corp.WEED-T27.4%48.5%
Westshore Terminals Corp.WTE-T24.2%0.3%

Source: S3 Partners

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

Many of the companies with lofty valuations have had huge run-ups in their stock prices over the past 3 to 4 months. The big gainers include Barrick Gold (65 per cent), Shopify (145 per cent), Lululemon (105 per cent) and Alpha Pro Tech (280 per cent).

What accounts for such appreciation? One factor is that the companies’ products are very much in demand during the COVID-19 crisis.

Barrick Gold’s mines are benefiting from the safehaven flight to bullion, Shopify’s online storefronts help keep entrepreneurs in business, Lululemon’s casual athletic and leisure wear is a hit with folks sheltering at home and Alpha Pro Tech’s protective apparel/face masks are saving lives.

Eventually, the battle will be won against COVID-19 and companies benefiting from the pandemic should return to more normal operating levels. The result could be a moderation in financial performance – which may not be received well when their stocks are priced for perfection (and given the propensity for the late stages of lengthy business expansions to deliver negative surprises). Perhaps this scenario is what short sellers have in mind when they bet against these companies.

The five largest 3-month declines in short interest (June 22)

Company3-month change in short interest ($-mill)% decrease in short positionShort interest as of June 22 ($-mill)Short interest as % of float
Fortis Inc.FTS-T-$511-54.0%$4351.8%
Royal Bank of CanadaRY-T-$416-19.0%$1,7771.4%
Franco-Nevada Corp.FNV-T-$401-43.5%$5211.6%
CN RailwayCNR-T-$155-15.2%$8681.0%
iShares S&P/TSX Financials ETFXFN-T-$150-93.4%$111.2%

Source: S3 Partners

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

Although short sellers have recently become more bearish on stock markets at the macro level, some companies have, of course, escaped their notice or may even have enjoyed a reduction in short sales. Going by two of the entries on the table listing the five companies with the largest three-month declines in short interest, Royal Bank and the iShares S&P/TSX Financials ETF (XFN-T) fall into this category.

This is an interesting development given the notion prevalent in some quarters that the COVID-19 crisis would crash the high flying Canadian housing market and, in turn, the banks and other mortgage lenders. There was indeed a sharp sell-off in their stocks in March but the 25 per cent gain in XFN since the bottom, and the pullback by short-sellers, seems to be signalling a less dire scenario.

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

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