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What are the short sellers up to? If they are targeting a stock of yours, you may want to double-check the buy or hold thesis. If they are withdrawing, there might some value stocks to examine.

In brief, short sellers recently raised their bets against a number of retail, solar energy and cannabis companies. On the flip side, they retreated from some beleaguered sectors – particularly energy companies. Bank exchange-traded funds (ETFs) also got some relief.

Significant increases in short interest

When we rank companies by the increase in short sales experienced over the month ending Oct. 26, consumer-sector firms Restaurant Brands International Inc., Canadian Tire Corp. and Canada Goose Holdings Inc. are near the top. Data for increases in short sales are based on dollar values from S3 Research and, in this analysis, exclude increases less than 20 per cent.

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Canadian Tire Corp. has been the subject negative reports in the past from activist short sellers and independent researchers, such as Bradley Safalow (PAA Research), Steve Eisman (Neuberger Berman) and Ben Axler (Spruce Point Capital). Nonetheless, its stock has been remarkably resilient over the past year.

Significant increases in short interest during the month to Oct. 26

CompanyIncrease in short sales for month to Oct. 26 ($-mil)% increase in short salesShort interest as % of float
Canopy Growth Corp.WEED-T$251.9 20.9%25.2%
Restaurant Brands Intl.QSR-T$173.1 20.3%4.7%
Canadian Tire Corp.CTC-A-T$167.7 21.7%10.8%
Magna Intl.MG-T$103.1 28.9%2.3%
Canada Goose HoldingsGOOS-T$100.7 25.7%18.1%
Thomson Reuters Corp.TRI-T$90.8 32.4%2.0%
Tilray Inc.TLRY-Q$90.0 67.8%29.5%
Canadian Solar Inc.CSIQ-Q$76.9 52.5%9.5%
Algonquin Power & UtilitiesAQN-T$64.5 27.6%2.5%
Boralex Inc.BLX-T$52.5 68.4%3.1%

Includes only companies whose short sales increased by more than 20%; U.S. trades are included for inter-listed stocks (after converting to CAD)

A relative newcomer to the rankings is solar-cell manufacturer Canadian Solar Inc. Its U.S. branch import bifacial solar modules, which are facing U.S. tariff increases. The company’s recent convertible-debt and scheduled inter-listing on a Chinese exchange may also have created arbitrage opportunities for short sellers.

When short positions are quoted in dollar values, changes over time may also reflect changes in the price of the stock, not just short-seller transactions. For most of the increases, this distortion factor was not very material. An exception was Canopy Growth, which had a very large increase in stock price during the month that would account for all of the observed increase in its short position – and then some (so, short-sellers likely reduced their bets).

Significant decreases in short interest

The top three companies with significant decreases in short interest over the past three months to Oct. 26 are from the beleaguered energy sector: Suncor Energy, Ovintiv Inc. and Imperial Oil Ltd. Stock valuations in the industry are at rock-bottom levels.

Significant decreases in short interest during the 3 months to Oct. 26

CompanyDecrease in short sales over past 3 months ($-mil)% decrease in short sales over past 3 months Short interest as % of float
Suncor Energy Inc.SU-T-$222.8-32.8%2.05%
Ovintiv Inc.OVV-T-$199.5-33.1%12.64%
Imperial Oil Ltd.IMO-T-$172.8-39.4%7.14%
SNC-Lavalin GroupSNC-T-$145.5-42.1%5.29%
Brookfield RenewableBEP-U-T-$123.5-52.9%0.86%
iShares S&P/TSX Financials ETFXFN-T-$115.5-89.1%1.65%
First Quantum MineralsFM-T-$98.5-31.4%2.77%
BMO Equal Weight Banks ETFZEB-T-$90.0-69.7%3.02%
Primo Water Corp.PRMW-T-$82.2-36.1%5.18%
Alpha Pro Tech Ltd.APT-A-$76.7-59.2%23.35%

U.S. trades are included for inter-listed stocks (after converting to CAD); Includes only companies whose short sales decreased by 30%

There was a sharp reduction in bets against the iShares S&P/TSX Financials ETF and BMO Equal Weight Banks ETF. Investors in bank stocks have long heard dire predictions of a crash in the Canadian housing market but the sharp reduction in mortgage rates in recent months (precipitated by the COVID-19 crisis) may now be giving housing a boost.

SNC-Lavalin Group had a substantial decline. The engineering and construction consulting firm, has reported a series of earnings disappointments in past quarters while labouring under the weight of past bribery charges. It’s trading two-thirds below the mid-2018 peak, leaving valuation near historic lows.

The declines in short positions in this section were not materially distorted by changes in share prices. Part of the fall in the dollar amounts for the energy companies was due to an average 15-per-cent drop in prices for energy stocks over the period but even if this price-related decline is adjusted out of the numbers, the volume of short-seller trades is still substantial.

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Largest short positions as percentage of float

Jumping to the top of companies with the highest percentage of float short is TAAT Lifestyle & Wellness Ltd., formerly known as Molori Energy Inc. It is ramping up to manufacture and distribute hemp cigarettes. They look like regular cigarettes, except the nicotine is replaced by at least 50mg of cannabidiol.

In recent months, the company has issued several press releases. They have announced the signing of distribution agreements, hiring of executives, setting up of manufacturing processes, submission of applications for patents, and raising of capital through private placements.

One explanation for the short position may be related to the private placements. As has been seen in the past with other junior companies, the discounts to market prices offered in private placements can be converted into certain returns by investors shorting the company’s listed shares and then closing the position with shares that were acquired via the private placement.

Largest short positions as percentage of float as of Oct. 26

CompanyShort interest as % of floatAnnualized borrow fee% change in short sales for month to Oct. 26
TAAT Lifestyle & Wellness Ltd.TAAT-T53.4%12.6%1538.9%
Cronos GroupCRON-T30.9%2.0%12.6%
Tilray Inc.TLRY-T29.5%21.3%67.8%
First Majestic Silver Corp.FR-T26.4%1.0%11.7%
Westshore Terminals Corp.WTE-T25.4%0.3%-9.1%
Aurora Cannabis Inc.ACB-T25.3%10.7%-18.0%
Canopy Growth Corp.WEED-T25.2%3.3%20.9%
Alpha Pro Tech Ltd.APT-A23.4%8.1%8.2%
iShares S&P/TSX 60 ETFXIU-T21.6%0.8%2.0%
Paramount ResourcesPOU-T21.0%13.5%22.6%
VBI Vaccines Inc.VBIV-Q18.2%2.8%-0.7%
Canada Goose HoldingsGOOS-T18.1%1.2%25.7%
Aurania Resources Ltd.ARU-T16.6%1.0%441.8%
Advantage Oil & Gas Ltd.AAV-T15.5%1.8%64.4%
AutoCanada Inc.ACQ-T14.8%6.3%13.7%
Frontera Energy Corp.FEC-T14.6%9.1%-22.4%
Aphria Inc.APHA-T14.4%2.2%3.8%
Lions Gate EntertainmentLGF-A-N14.4%0.3%-29.6%
Village Farms InternationalVFF-T13.9%15.8%-4.4%
Lithium Americas Corp.LAC-T13.7%40.1%8.4%

Source: S3 Partners

U.S. trades are included for inter-listed stocks (after converting to CAD)

Activist short seller target: Loop Industries

Activist short seller Hindenburg Research released a mid-October research report on Loop Industries Inc., headquartered in Terrebonne, Quebec. The company’s stock currently trades about 50 per cent below its 52-week high.

According to the website, Loop is a recycling company that breaks down a common form of plastic called PET. Hindenberg alleges that its technology is not viable, and the chief executive officer has a history of stock promotions.

Hindenberg further claims that former Loop employees said the company has two research labs, one for two brothers and their father where the technical breakthroughs occurred, and one for rank-and-file employees who were unable to replicate the breakthroughs.

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Further reading

A new resource for short sellers and long investors (seeking to avoid loser stocks) is a YouTube channel set up by Muddy Waters Research founder Carson Block.

The content includes educational primers as well as sections on “Tells and Triggers” (what short sellers look for in companies), “The Chopping Block” (companies newly targeted by short sellers) and “deep-dive interviews” with legendary short sellers such as Jim Chanos. The section that Mr. Block calls the “The Chopping Block” could be a favourite – if only for the pun.

Regulators are moving toward banning short sales associated with private placements. A good exposition of what’s happening on this front can be found at Proposed Ban Targets Ontario IPO “Underworld.

Regulators in Ontario are encouraging the public to submit tips on abusive short selling to the regulators' whistleblower programs. See OSC and IIROC Seek Tips to Help Prosecute Short Sale Market Manipulators.

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