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Bearish sentiment appears to be on the rise for Canadian stocks, judging from the upward trend in short interest for an exchange-traded fund (ETF) that tracks the Toronto stock market.

As the chart below shows, the number of shares sold short in the iShares S&P/TSX 60 ETF (XIU-T) has climbed from 40 million to 75.2 million over the six months to Oct.30.

The 20 most heavily shorted companies are shown in the first table below. The criterion used to rank them is the percentage of outstanding shares on loan, which serves as a proxy for short sales since short sellers need to first borrow shares to sell them.

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Canadian companies with the highest percentage of shares on loan (Nov. 13)

Company Sector % shares on loan Days to cover Insider transactions (past year) Price trend over last 6 months Convertible debt
Laurentian Bank of Canada LB-T Banks 27.6 49 $458,229 down
First Majestic Silver Corp. FR-T Materials 23.1 61 ($3,031.51) down yes
Maxar Technologies Ltd. MAXR-T Capital Goods 17.4 15 $2,968,204 down
Badger Daylighting Ltd. BAD-T Capital Goods 17.3 43 $704,052 range
Genworth MI Canada Inc. MIC-T Mortgage 12.9 46 ($7,821,783) range
Canadian Western Bank CWB-T Banks 12.4 39 ($1,431,919) range
Sleep Country Canada Holdings Inc. ZZZ-T Retailing 11.8 19 ($18,837,729) strong down
Vermilion Energy Inc. VET-T Energy 11.7 17 ($20,211.44) down
Home Capital Group Inc. HCG-T Banks 11.5 33 $2,541,519 strong up
Pretium Resources Inc. PVG-T Materials 11.4 33 ($3,134,501) strong up
Prairiesky Royalty Ltd. PSK-T Energy 11.2 41 $1,094,539 down
WestJet Airlines Ltd. WJA-T Transportation 11.2 27 $730,897 range
Just Energy Group Inc. JE-T Utilities 10.2 48 $962,627 rane yes
Canopy Growth Corp. WEED-T Marijuana 10.2 5 ($190,542,559) strong up
Cineplex Inc. CGX-T Media 10.1 30 $1,373,622 strong up yes
Aurora Cannabis Inc. ACB-T Marijuana 9.9 2 ($78,348,701) range
Paramount Resources Ltd. POU-T Energy 9.8 31 $1,320,794 strong down
Birchcliff Energy Ltd. BIR-T Energy 9.5 20 $695,644 range
Tahoe Resources Inc. THO-T Materials 9 29 $13,970 strong down
Keyera Corp. KEY-T Energy 9 27 ($137,636) down

Source: IHS Markit, INK Research and The Globe and Mail

There was a fair amount of stability, with 14 of the companies carrying over from the previous month.

Of these, Laurentian Bank of Canada once again claimed the top spot, having more than 27 per cent of its shares on loan. Laurentian Bank, the only unionized bank in North America, is facing the prospect of a labour strike as well as restraints on the upgrading of its branches and internal systems.

Maxar Technologies Ltd. and Badger Daylighting Ltd. also remain near the top of the rankings but nonetheless saw declines in their short interest.

Sleep Country Canada Holdings Inc. was one of the few incumbents to record a sizable jump in the percentage of shares on loan. Rising competition from online and bricks-and-mortar suppliers is contributing to weak mattress sales.

New companies on the table are: Vermilion Energy Inc., Just Energy Group Inc., Keyera Corp., Tahoe Resources Inc. Canopy Growth Corp. and Aurora Cannabis Inc. The first three are from the Canadian energy sector, which is saddled with depressed domestic prices as a result of pipeline and railway bottlenecks impeding the flow of Canadian oil and gas to world markets.

Canopy Growth Corp. and Aurora Cannabis Inc. are leading companies in the Canadian marijuana sector. It seems short sellers are becoming more convinced that valuations have gotten too far ahead of the fundamentals following the run-up in stock prices ignited in August by beverage company Constellation Brands investing $5-billion in Canopy Growth.

Enhancements to the table of companies with the highest percentage of loaned-out shares

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As can be seen, we are adding more columns to the table displaying companies with the highest percentage of shares short. This is to help readers better interpret the percentages.

One issue: many academic studies have found that a high level of short interest for a company presages poor stock performance but sometimes, the downward trend may be temporarily interrupted or reversed by a “short squeeze” (upward spike in share price caused by short sellers rushing to buy shares and return them). So when short interest becomes quite elevated, it could sometimes be a bullish signal, at least in the short term.

How to tell when a short position is a bearish or bullish signal?

Financial scholars have studied this issue and come up with several criteria for making the distinction. They say the risk of a squeeze increases when: i) short positions are large relative to trading volumes over the past 30 days (days-to-cover ratio), ii) insider buying is substantial and iii) an uptrend in share price is inflicting losses on short sellers. These criteria have been added to the table this month.

The risk of a short squeeze should be low for companies that have a small days-to-cover ratio (under 10, by one rule of thumb), substantial insider selling and a downtrend in share price. The following companies seem to fit this bill: Sleep Country Canada Holdings Inc., First Majestic Silver Corp., Genworth MI Canada Inc., and Vermilion Energy Inc. The two marijuana companies, Canopy Growth Corp. and Aurora Cannabis Inc., had huge insider selling and could perhaps be added to this list but both had low days-to-cover ratios.

Conversely, a candidate for a short squeeze would have a high days-to-cover ratio, substantial insider buying and an uptrend in share price. On this basis, Cineplex Inc. could be at risk. We could also declare Home Capital Group Inc. at risk, but it appears a squeeze just happened with a jump of more than 30 per cent in share price when management announced on Nov. 7 that third-quarter earnings beat expectations and a $300-million share buyback was to be launched.

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Another issue: sometimes a short position reflects not a directional bet on a stock price but an arbitrage operation related to convertible securities. To help distinguish these cases, a column is added to the table to indicate if a company has convertible debt and, therefore, its short position may reflect to some extent an arbitraging operation.

The table below shows the top 20 companies in terms of the cost to borrow their shares. The cost to borrow is a useful indicator of bearish sentiment when the number of loanable shares is small and short sellers reveal their views more through how much borrowing costs are bid up rather than the number of shares borrowed.

The most expensive shares to borrow (as of Nov. 13)

Company Sector Cost to borrow (annualized)
Mega Uranium Ltd. MGA-T Mining 95.7
Ballard Power Systems Inc. BLDP-T Fuel cells 61.7
Royal Nickel Corp. RNX-T Mining 61.3
Aeterna Zentaris Inc. AEZS-T Pharma 61
CuraLeaf Holdings Inc. CURA-CN Marijuana 51.2
Green Organic Dutchman Holdings TGOD-T Marijuana 50.7
Ecobalt Solutions Inc. ECS-T Mining 46.7
First Vanadium Corp. FVAN-X Mining 45.8
Callidus Capital Corp. CBL-T Financing 40.8
MPX Bioceutical Corp. MPX-CN Pharma 39.1
Invictus MD Strategies Corp. GENE-X Marijuana 38.6
Abattis Bioceuticals Corp. ATT-CN Marijuana 38.4
Acasti Pharma Inc. ACST-X Pharma 38.2
Street Capital Group Inc. SCB-T Mortgages 38
Lithium Americans Corp. LAC-T Mining 37.8
Resverlogix Corp. RVX-T Biotech 36.7
Auxly Cannabis Group Inc. XLY-X Marijuana 36.2
Katanga Mining Ltd. KAT-T Mining 35.7
Aleafia Health Inc. ALEF-X Marijuana 35.5
Zargon Oil and Gas Ltd. ZAR-T Energy 35

Source: Interactive Brokers

Mega Uranium Ltd. has been at, or near the top of the table for three months, thanks to a borrowing cost of close to 100 per cent for its shares. The junior mining company has uranium properties in Australia and Canada. In August, it raised gross financing of $1.5-million through a private placement of 13,636,364 units, each consisting of one share and one warrant.

Ballard Power Systems has jumped onto the table after largely being absent from it over the past year. The company has been involved in efforts to commercialize hydrogen fuel cells for a number of years. Earlier this year, short-selling firm Spruce Point Capital Management released a research report with a strong sell recommendation.

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