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Tracking the trades of short sellers can help investors avoid stocks that underperform, according to studies published in peer-reviewed journals. Let’s therefore review some of the highlights in short-selling activity on the Toronto Stock Exchange for the month ending July 25, as sourced from data-analytics firm S3 Partners..

Short sellers borrow stocks and sell them in hopes they can capture a profit by returning the borrowed stocks at a lower price. Because of higher trading costs (e.g. borrow fees) and the risk of unlimited loses, academics say short sellers tend to perform extensive due diligence.

Short sales at the market level

Short sellers were slightly more bearish on the direction of the TSX in July, as proxied by the short position in the iShares S&P/TSX 60 ETF (XIU-T). On July 25, it stood at $2.5-billion, compared to $2.3-billion in June and $2.2-billion in May. The price of XIU was unchanged over the month, so the increase in the short position from June was due to short sellers opening new positions.

Short sales at the sector level (focus on cannabis sector)

S3 Partners reports that total short interest in the cannabis sector (includes Canadian and U.S. companies) has declined substantially over the past year, from $4-billion to $809-million (U.S. dollars converted to Canadian dollars). This decline is due mostly to the downtrend in the stock prices of cannabis companies; short sellers did not actively add to their positions.

Short selling is highly concentrated in a handful of names. The top-ten short positions sum to $749-million, or 92 per cent of the sector’s total short position. Tilray Brands Inc. (TLRY-T) and Canopy Growth Corp. (WEED-T) remain the top two shorts in the sector, comprising over half of total short sales.

Short interest in cannabis stocks (as of July 13)

COMPANY SHORT INTEREST (MILLIONS OF C$)
Tilray Inc.TLRY-Q$312.90
Canopy Growth Corp.WEED-T$145.50
Sundial Growers Inc.SNDL-N$84.80
Cronos Group Inc.CRON-T$74.10
Aurora Cannabis Inc.ACB-T$54.10
Trulieve Cannabis Corp.TRUL-T$18.20
Organigram Holdings Inc.OGI-T$17.10
Verano Holdings Corp.VRNO-T$15.30
HEXO Corp.HEXO-T$14.60
WM Technologies Inc.MAPS-Q$12.50
Sum of the top 10 companies $749.20
Sum for sector$809.00

Source: S3 Partners

Short sales at the company level (targets of activist short sellers)

Activist short sellers publish sell recommendations on companies and disseminate their bearish views through social and/or conventional media. Their trades are tracked by Breakout Point GmbH.

In the second quarter of 2022, two Canadian companies were targeted. One was A2Z Smart Technologies Corp. (AZ-X), a junior technology company whose flagship product is a “mobile self-checkout shopping chart.” The other was Reliq Health Technologies Inc. (RHT-X), a telemedicine firm that focuses on remote patient monitoring.

During the past 18 months, 18 campaigns were launched against Canadian companies (two were aimed at Standard Lithium Ltd). The stock prices of all the companies are down, aided by the bear market in 2022.

The average price decline is approximately 55 per cent, so activist short sellers are currently enjoying good times. Only three of the sell recommendations have reached their target price; the rest still have room to fall, according to the short sellers’ target prices.

Canadian companies targeted by activist short sellers

COMPANY ACTIVIST SHORT SELLERDATE ISSUEDPRICE CHANGETARGET PRICE REACHED?
A2Z Smart Technologies CorpAZ-Q White Diamond Research 2022-Q2-23%No
Reliq Health Technologies IncRHT-X White Diamond Research 2022-Q2-27%No
Emerita Resources CorpEMO-X GRIZZLY RESEARCH 2022-Q1-68%No
Li-Cycle Holdings CorpLICY-N Blue Orca Capital 2022-Q1-27%No
Zentek LtdZTEK-Q Night Market Research 2022-Q1-9%No
Standard Lithium LtdSLI-A Blue Orca Capital 2022-Q1-26%No
Nuvei CorpNVEI-T Spruce Point Capital 2021-Q4-42%Yes
Standard Lithium LtdSLI-A Hindenburg Research 2021-Q4-46%No
TMC The Metals Co. IncTMC-Q Bonitas Research 2021-Q4-82%No
Peak Fintech Group IncPKK-CN GRIZZLY RESEARCH 2021-Q4-87%No
Lightspeed Commerce Inc.LSPD-N Spruce Point Capital 2021-Q3-61%Yes
Flora Growth CorpFLGC-Q White Diamond 2021-Q3-81%Yes
Reconnaissance Energy AfricaRECO-X Viceroy Research 2021-Q2-71%No
Cielo Waste Solutions CorpCMC-X Night Market Research 2021-Q2-91%No
Pyrogenesis Canada IncPYR-T Mariner Research 2021-Q2-74%No
Well Health Technologies CorpWELL-T GRIZZLY RESEARCH 2021-Q2-54%No
Mountain Valley MD Holdings MVMD-T Night Market Research 2021-Q1-94%No
Exro Technologies IncEXRO-T Mariner Research 2021-Q1-77%No

Source: Breakout Point GmbH

Short sales at the company level (high percentage of float sold short)

New entries this month on the table for companies with the highest percentage of float short are: Betapro Nat Gas 2x Daily Bull ETF (HNU-T), Horizons US Dollar Currency ETF (DLR-T), Lithium Americas Corp. (LAC-T) and Milestone Pharmaceuticals Inc. (MIST-Q). One could perhaps postulate that short sellers are using HNU to bet that natural gas prices have risen too far; they are using DLR to bet that the U.S. dollar has appreciated too much. LAC is tied to the EV sector, which short sellers are becoming skeptical about. MIST is a biopharmaceutical company focused on the development of innovative cardiovascular medicines.”

The top-20 short percentages by percentage of float (July 25)

COMPANY % OF FLOAT SOLD SHORT JULY 25
Air CanadaAC-T38.4%
iShares S&P/TSX 60 ETFXIU-T23.9%
Canopy Growth CorpWEED-T22.9%
Lion Electric CoLEV-T22.2%
Betapro Nat Gas 2x Daily Bull ETFHNU-T19.1%
Energy Fuels IncEFR-T18.4%
Canada Goose HldgsGOOS-T18.1%
Horizons US Dollar Currency ETFDLR-T17.0%
Tilray Brands IncTLRY-Q16.5%
Bellus Health IncBLU-T14.5%
Aurora Cannabis IncACB-T14.4%
Ci Galaxy Ethereum ETFETHX-B-T14.3%
Briacell Therapeutics CorpBCT-T14.0%
Hut 8 Mining CorpHUT-T12.9%
Ballard Power SystemsBLDP-T12.6%
Dream Office REITD-U-T12.5%
Lithium Americas CorpLAC-T11.9%
Hexo CorpHEXO-T11.9%
Milestone PharmaceuticalsMIST-Q11.7%
Great West Lifeco Inc GWO-T11.6%

Source: S3 Partners

Larry MacDonald also writes at Investing Journey.

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