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Let’s review recent highlights in short-selling activity on the Toronto Stock Exchange, as provided by S3 Partners.

Short sellers borrow stocks and sell them on the expectation they can earn a profit by returning the borrowed stocks at a lower price. Tracking short interest can help long investors avoid underperforming stocks, according to academic studies.

At the company level, Air Canada (AC-T) was the most shorted stock as of June 27, with 36.8 per cent of its float sold short. Air Canada and many of the other companies on the top-20 shorted list have been discussed in previous monthly updates. Note that some short positions may not reflect a purely bearish bet but hedging of convertible securities issued by the targeted company.

The AGFiQ US Market Neutral Anti-Beta C$-Hedged ETF (QBTL-T) appears for the first time on the table of the 20 most shorted stocks, leaping all the way into second place with 25.2 per cent of float short. The ETF was launched in 2019 to “provide a consistent negative beta exposure to the U.S. equity market by investing primarily in long positions in low beta U.S. equities and short positions in high beta U.S. equities on a dollar neutral basis.”

Top 20 short positions by percentage of float (June 27)

Air CanadaAC-T36.8%
AGFiQ US Neutral Anti-Beta Hedged ETFQBTL-T25.2%
Lion Electric CoLEV-T25.1%
Canopy Growth CorpWEED-T21.9%
iShares S&P/TSX 60 ETFXIU-T21.4%
Canada Goose HoldingsGOOS-T20.4%
Energy Fuels IncEFR-T19.3%
Meta Materials IncMMAT-Q17.2%
Briacell Therapeutics CorpBCT-T16.9%
Tilray Brands IncTLRY-T15.4%
Hexo CorpHEXO-T14.6%
Hut 8 Mining CorpHUT-T13.8%
Victoria Gold CorpVGCX-T13.5%
Ballard Power SystemsBLDP-T13.5%
Dream Office REITD.U-T13.1%
Aurora Cannabis IncACB-T12.9%
iShares S&P/TSX Capped Energy ETFXEG-T11.7%
Bellus Health IncBLU-T11.7%
Great West Lifeco IncGWO-T11.6%
CI Galaxy Ethereum ETFETHX.B-T11.6%

Source: S3 Partners

Five of the companies on the table had excessive costs to borrow: Lion Electric Co. (17.6 per cent), Canopy Growth Corp. (27.3 per cent), Meta Materials Inc. (51.8 per cent), Briacell Therapeutics Corp. (21.3 per cent) and Hexo Corp. (46.9 per cent). High borrowing costs reinforce the bearish signal of a high short position. But they could also result in a short squeeze if the rates go too high and make it too costly to go short.

Heavily shorted stocks are also more susceptible to a short squeeze when they have low trading volumes relative to their short positions. Four companies in the top twenty have extremely high days-to-cover ratios: Air Canada (136 days), AGFiQ US Market Neutral Anti-Beta C$-Hedged ETF (242 days), Dream Office REIT (181 days) and Great West Lifeco Inc. (126 days).

Special study: trends in short sales within the banking sector

Canada was one of the few countries to emerge relatively unscathed from the Great Financial Crisis of 2008. Will its housing market and banking system be able to pull off an encore as interest rates skyrocket in 2022? Perhaps the short positions in Canadian banking stocks can provide some hints of what lies ahead.

The Big 5 Canadian banks straddle the economy like a colossus. Their market capitalizations are among the largest of the Toronto Stock Exchange and their short positions are nearly always in the top ten as a result. In June of 2022, TD Bank had the largest short position ($5.8 billion) of the Big 5 banks and the Bank of Montreal (BMO-T) had the smallest ($2.5 billion).

Trends in the short positions of Canada's Big 5 banks ($-billions)

T-D BankTD-T$5.8$6.3$5.9$5.8$5.3$5.8$5.0
Royal BankRY-T$2.7$2.8$2.9$2.0$2.1$2.8$1.9
Bank of Nova ScotiaBNS-T$4.4$4.3$4.0$4.0$4.1$4.7$3.9
Bank of MontrealBMO-T$2.5$2.5$2.2$2.3$2.3$2.2$2.1

Source: S3 Partners

The trend over time in the banks’ short positions can tell us if bearishness is increasing or decreasing. Inspecting end-of-quarter short interest from the fourth quarter of 2020 to the second quarter of 2022, we can see that all five banks have a fairly flat trend so far. It would thus seem short sellers are not particularly worried about the housing market or the banking system.

The percentage of float sold short can also be examined. In the second quarter of 2022, the percentages are relatively low, ranging from 5.5. per cent for Canadian Imperial Bank of Commerce (CM-T) to 1.6 per cent for Royal Bank of Canada (RY-T). CIBC is the smallest of the big five banks and depends more upon the Canadian housing market while Royal Bank is the largest of the Big 5 and more diversified in terms of foreign operations and financial services.

The percentage of float sold short for any bank does not show much in the way of a trend up or down. It is relatively stable over recent quarters, again suggesting short sellers are not becoming more bearish at this time.

Trends in percentage by float short for Canada's Big 5 banks

T-D BankTD-T3.8%3.4%3.4%3.9%3.3%4.0%3.8%
Royal BankRY-T1.6%1.3%1.6%1.1%1.2%1.7%1.3%
Bank of Nova ScotiaBNS-T4.9%3.9%3.8%4.2%4.2%5.0%4.7%
Bank of MontrealBMO-T3.1%2.6%2.5%2.8%2.8%3.1%3.4%

Sell recommendations

Short sellers are not the only source of bearish signals in the stock market. There are many analysts that produce research reports recommending buying or selling shares in companies trading on the TSX. Sell recommendations are relatively rare so when they do appear, they are worth considering.

Veritas Investment Research in recent weeks issued several sell recommendations. What’s interesting about the list is the large representation of banking stocks; since Veritas Investment’s recommendations, their stock prices have been weak. If short interest in the banks follows suit and becomes more bearish, the recent downturn may not yet be ready for a reversal.

  • GFL Environmental Inc.
  • National Bank of Canada
  • Royal Bank of Canada
  • Toronto-Dominion Bank
  • Canadian Imperial Bank of Commerce
  • Bank of Nova Scotia
  • Emera Inc.

Larry MacDonald can also be found at Investing Journey

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