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Let’s look at recent short selling activity on the Toronto Stock Exchange. Short sellers borrow and sell stocks in hopes of returning them at lower prices. They risk unlimited losses and incur high trading costs, so their due diligence is usually solid; academics find a tendency toward underperformance in the stocks they target.

Thus, if a stock is attracting a crowd of short sellers and it is in your portfolio or under consideration for purchase, you might want to double-check your bullish thesis.

The 20 companies with the highest percentage of float sold short as of Oct. 18 re shown in the following table, which is sourced from S3 Partners. Leading the group is Air Canada (AC-T), with 29.3 per cent of its float sold short; it has been at, or near, the top for over a year, which surely sets a record – although the percentage has trended down in recent months. A substantial part of the airliner’s short position may not entirely reflect bearish sentiment but represent hedging of its convertible debentures.

Top 20 short positions by percentage of float (Oct. 18)

Air CanadaAC-T29.3%
iShares S&P/TSX 60 ETFXIU-T27.2%
Horizons US Dollar ETFDLR-T23.4%
Canada Goose HoldingsGOOS-T20.6%
Canopy Growth Corp.WEED-T18.6%
Energy Fuels Inc.EFR-T18.0%
Zymeworks Inc.ZYME-N16.0%
Aurora Cannabis Inc.ACB-T14.5%
Ballard Power SystemsBLDP-T14.5%
Frontera Energy Corp.FEC-T13.7%
Briacell Therapeutics Corp.BCT-T13.3%
Great-West Lifeco Inc.GWO-T12.4%
SNDL Inc.SNDL-Q12.3%
Tucows Inc.TC-T12.2%
Bellus Health Inc.BLU-T12.1%
Hut 8 Mining Corp.HUT-T12.1%
BMO Money Market Fund ETFZMMK-T11.9%
Bausch Health Co. Inc.BHC-T11.6%
Li-Cycle Holdings Corp.LICY-N11.3%
Tilray Brands Inc.TLRY-T11.3%

Source: S3 Partners

Stocks with relatively large short positions are vulnerable to short squeezes (the price of a stock price shoots upward when short sellers storm the exits to buy back the shares they borrowed). One trigger is a high cost to borrow; another is low daily trading volumes relative to the number of short sales – although, both may lack firing power in the currently bearish environment. Two companies had high borrowing costs: Briacell Therapeutics Corp. (BCT-T, 24.4 per cent) and Hut 8 Mining Corp. (HUT-T, 19.6 per cent). One company had had a high days-to-cover ratio: Great-West Lifeco Inc. (GWO-T, 253 days).

Several companies are new to the table this month. Two of note are: Zymeworks Inc. (ZYME-N), a Vancouver-based biotechnology company that develops protein therapeutics for the treatment of cancer and autoimmune or inflammatory diseases) and Li-Cycle Holdings Corp. (LICY-N), engaged in the recycling of lithium-ion batteries. Li-Cycle was targeted by activist short seller Blue Orca Capital in a March 24/2022 report.

The next table ranks the 15 stocks with the largest short positions by dollar value, as of Oct. 18. In first place is Toronto-Dominion Bank (TD-T) with short sales of $8-billion, followed by Bank of Nova Scotia (BNS-T) at $5.6-billion and Enbridge Inc. (ENB-T) at $5.4-billion.

15 largest short positions by dollar value on Oct. 18 versus a year ago

1Toronto-Dominion BankTD-T$8.0$5.45.2%3.3%
2Bank of Nova ScotiaBNS-T$5.6$3.67.1%3.6%
3Enbridge Inc.ENB-T$5.4$4.75.3%4.4%
4TC Energy Corp.TRP-T$4.9$3.48.9%5.1%
6Canadian Natural ResourcesCNQ-T$3.6$1.44.4%2.2%
7Royal Bank of CanadaRY-T$3.2$2.11.8%1.1%
8Bank of MontrealBMO-T$3.0$2.13.7%2.4%
9iShares S&P/TSX 60 ETFXIU-T$2.7$1.427.2%13.8%
10CP RailwayCP-T$2.4$8.12.7%13.0%
11BCE Inc.BCE-T$2.3$2.24.3%3.8%
12Shopify Inc.SHOP-T$2.1$3.35.8%1.7%
14Manulife FinancialMFC-T$2.1$1.84.9%3.6%
15Telus Corp.T-T$1.9$1.55.0%3.9%

Source: S3 Partners

Large short positions may not necessarily reflect heavy bearish sentiment but simply a large number of shares trading and/or hedging tied to convertible securities, pairs trades and so on. What is interesting, however, is the uptrend in the short positions: The table shows that the dollar value of short interest for nearly every company is now noticeably higher than a year ago. One exception is Canadian Pacific Railway Ltd. (CP-T) – the dollar value of its short sales was much higher last fall because hedge funds had engaged in merger arbitrage when CP Rail launched a bid to acquire the Kansas City Southern railroad.

The other exception was Shopify Inc. (SHOP-T): the dollar value of its current short position was below last year’s number because of a drop of about three-quarters in its stock price; short sellers did raise their bets, as indicated by the rise in the percentage of freely trading shares short from 1.7 per cent to 5.8 per cent, but it wasn’t enough to bring the dollar value of the short position up to last year’s level. Could this diminution in short sellers’ risk exposure perhaps signal the glimmerings of a recovery in the ecommerce firm’s stock price?

Activist short sellers (who publish their negative views on a company) are having a field day in the bearish market of the last four quarters. The shares of the Canadian companies in their sights have declined considerably more than the market – as can be seen in the next chart, which is sourced from Breakout Point.

Canadian companies targeted by activist short sellers in year to Sept. 30

1Air Boss of AmericaBOS-TOSS Research9/8/2022-37-50
2AZZ Smart TechnologiesAZ-TWhite Diamond5/11/2022-50-50
3Reliq Health TechnologiesRQHF-TWhite Diamond4/14/2022-33na
4Emerita ResourcesEMO-TGrizzly3/29/2022-69-89
5Li-Cycle HoldingsLICY-TBlue Orca3/21/2022-31na
6Zentek Ltd.ZTEKNight Market8/22/2022-46-100
7Standard LithiumSLI-THindenberg2/3/2022-50na
8Nuvei Corp.NVEI-TSpruce Point12/8/2021-40-40
9Standard LithiumSLI-XBlue Orca11/18/2021-63na
10TMC The Metals Co.TMC-XBonitas10/6/2021-76na
11Peak Fintech GroupPKK-CNGrizzly10/4/2021-90na

Source: Breakout Point

The average decline to date in the activist short seller’s picks is 53.2 per cent. By comparison, the iShares S&P TSX 60 Index ETF (XIU-T) is down 10.5 per cent over the year ending Sept.30, 2022.

Only one position was initiated in the third quarter of 2022: OSS Research issued a sell report on Air Boss of America Corp. (BOS-T), which makes customized rubber-based products for automotive, construction, energy, healthcare, defense and other industries.

Larry MacDonald also writes at Investing Journey.

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