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Stock markets have rallied as inflation edges down and job growth stays strong. But there are still some pockets of bearish sentiment in sectors such as cannabis, banking, cryptocurrencies, electric vehicles and biotech, according to S3 Partners and other sources.

Market level

Short interest for the iShares S&P/TSX 60 ETF (XIU-T) was $2.7-billion on Feb. 22, compared to $2.6-billion 30 days ago and $2.5-billion 90 days ago. Thus, bearish sentiment at the macro level has trended slightly higher over the past three months.

Sector level

At the end of 2022, option trades on cryptocurrency ETFs were signaling strong bullish sentiment, and strong bearish sentiment on the iShares S&P/TSX Energy Index (XEG-T) and BMO Equal Weight Banks Index (ZEB-T) ETFs (see the Dec. 22, 2022 edition of Short sales on the TSX: What bearish investors are betting against column). As of Feb. 22, option trading on the cryptocurrency ETFs now show a substantial decline in bullish sentiment; XEG and ZEB options continue to display bearish sentiment.

Update on ETFs with bullish and bearish option trades

CI Galaxy Ethereum ETFETHX-T0.0066.27No longer bullish
Purpose Ether ETFETHH-T2.94.9Much less bullish
Purpose Bitcoin ETF CAD ETF BTCC-T2.76.72Much less bullish
iShares S&P/TSX Energy Index ETFXEG-T0.030.06More bearish
BMO Equal Weight Banks Index ETFZEB-T0.170.12Slightly less bearish

Source: Montreal Exchange – Options List

Company level

There are seven new entries on the latest table of The 20 most shorted companies by percentage of float. Two of them landed at the top: the Betapro Nat Gas 2x Bear ETF (31.2 per cent) and Horizons US Dollar Currency ETF (27.6 per cent). The other five are: Bausch Lomb Corp. (19.1 per cent), Meta Materials Inc. (14.4 per cent), Achieve Life Sciences Inc. (14.0 per cent), Air Canada (12.7 per cent) and Ritchie Bros Auctioneers (12.4 per cent).

Top 20 most shorted companies by percentage of float (Feb. 22)

Betapro NatGas 2x Bear ETFHND-T31.2%76.1%
Horizons US Dollar Currency ETFDLR-T27.6%1.5%
iShares S&P/TSX 60 ETFXIU-T24.6%-0.9%
Lion Electric CoLEV-T24.3%-2.4%
Canada Goose HldgsGOOS-T24.1%-9.7%
Canopy Growth CorpWEED-T20.0%-6.3%
Bausch Lomb CorpBLCO-T19.1%8.2%
Pan American SilverPAAS-T18.1%-16.7%
Briacell Therapeutics CorpBCT-T16.0%-0.7%
Energy Fuels IncEFR-T15.2%-4.0%
Home Capital Group IncHCG-T15.1%-1.4%
Purpose Bitcoin ETFBTCC-B-T14.5%10.6%
Ballard Power SystemsBLDP-T14.5%-1.8%
Meta Materials IncMMAT-Q14.4%-36.3%
Achieve Life Sciences Inc.ACHV-Q14.0%18.6%
Aurora Cannabis IncACB-T14.0%-7.9%
Frontera Energy CorpFEC-T12.7%-8.2%
Air CanadaAC-T12.7%6.7%
Ritchie Bros AuctioneersRBA-T12.4%2.1%
Lithium Americas CorpLAC-T12.1%9.7%

Source: S3 Partners

Of the companies carrying over from the previous month, three had significant increases in the percentage of their float short. Lion Electric Co., which makes electric buses and trucks, jumped five percentage points to 23.1 per cent. Pan American Silver, an operator of silver mines in Latin America, climbed by four percentage points to 18.1 per cent. Briacell Therapeutics Corp., which is developing cancer treatments, rose by three percentage points to 16.0 per cent.

With their high costs to borrow, three candidates for short squeezes are: Canopy Growth Corp. (47.7 per cent), Briacell Therapeutics Corp. (32.7 per cent) and Purpose Bitcoin ETF (19.3 per cent). Two short-squeeze candidates with high days-to-cover ratios are: Frontera Energy Corp. (53 days) and Air Canada (34 days).

Veritas Investment Research has a reputation for independent investment research. In recent weeks, their analysts have issued several sell or reduce recommendations.

Sell or reduce recommendations by Veritas Investment

Brookfield Asset Management LtdBAM-T
Canadian Imperial Bank of CommerceCM-T
Canadian National Railway Co.CNR-T
Cenovus Energy IncCVE-T
Cogeco Communications IncCCA-T
First Capital REIT FCR-UN-T
Imperial OilIMO-T
National Bank of CanadaNA-T
Royal Bank of CanadaRY-T
Smartcentres REITSRU-UN-T
Toronto-Dominion BankTD-T

Source: Veritas Investment Research

The alternative asset portfolios of Brookfield Corp. and its subsidiary Brookfield Asset Management Ltd (BAM-T) have outperformed the TSX for over a decade. Expectations remain high that the stellar returns will continue into 2023 – except, as Veritas cautions, the optimism will be hard to sustain in the current environment of higher interest rates and inflation.

For Canadian Imperial Bank of Commerce (CM-T) and the other banks on the list, Veritas expects that with “inflation running near a multi-decade high,” rate cuts will not occur until 2024. As a result of this prolonged period of restraint, expectations for higher credit losses may arise.

Canadian National Railway Co.’s (CNR-T) shipments are skewed toward cyclically sensitive goods. With central banks tightening to bring down inflation in 2023, an economic downturn seems likely – and CN Rail’s “uncharacteristically limited financial guidance” last quarter doesn’t engender optimism.

Cenovus Energy Inc. (CVE-T), Imperial Oil Ltd. (IMO-T) and other oil companies with refining exposure are likely to see shrinkage in the crack spread (difference between prices they pay for crude oil and the prices they receive for refined products such as gasoline, diesel and other distillates). The shrinkage is likely because inventories of refined products are rising, Veritas says.

Cogeco Communications Inc. (CCA-T) has a spotty track record making acquisitions, according to Veritas. Now its “2021 purchase of cable systems in Ohio is looking like it will destroy value once again.”

First Capital REIT (FCR.UN-T) and SmartCentres REIT (SRU.UN-T) are retail REIT attempting to transition towards mixed-use retail properties due to the rise of ecommerce. However, Veritas has concerns about First Capital’s development pipeline and SmartCentres’ elevated payout ratio at 90 per cent.

Largest one-month increases in short positions (30 days to Feb. 22)

Enbridge IncENB-T$2,273.747.1%6.7%
Royal Bank of CanadaRY-T$1,191.633.0%2.5%
Shopify IncSHOP-T$822.133.3%4.9%
Manulife FinancialMFC-T$654.933.4%5.2%
Ritchie Bros AuctioneersRBA-T$390.451.1%12.4%
Fortis IncFTS-T$366.742.2%4.6%
Natl Bank of CanadaNA-T$336.520.0%5.9%
Sun Life FinancialSLF-T$328.735.1%3.2%
BMO S&P 500 ETFZSP-T$307.9322.0%4.2%
Barrick Gold CorpABX-T$239.911.7%5.9%
BCE IncBCE-T$216.412.6%3.4%
BMO S&P/TSX Eq Wt Banks ETFZEB-T$181.4128.6%11.0%
Brookfield CorpBN-T$163.418.3%1.6%
Shaw Communications Inc BSJR-B-T$158.420.2%5.2%
Cameco CorpCCO-T$152.823.1%4.9%
iShares S&P/TSX 60 ETFXIU-T$148.25.7%24.6%
Imperial Oil LtdIMO-T$119.712.9%8.8%
Colliers Intl GrpCIGI-T$115.834.6%7.9%
Rogers Comm BRCI-B-T$115.718.5%3.2%
Emera IncEMA-T$101.113.1%6.0%

Source: S3 Partners

Methodological notes:

1) Some short positions may reflect, in part or whole, hedging/arbitrage positions – so they are not entirely bearish bets.

2) Short positions in inter-listed stocks were summed across exchanges in Canadian dollars.

3) When an investor purchases stock that was sold by a short seller, it creates a synthetic long position; if these long positions are not included in the float count, the percentage-of-float-short metric can be overstated – however, most of the time, the magnitude is not significant.

4) The percentage of float short for ETFs is impacted by the ETF mechanism for creating/redeeming units, which results in almost daily changes in the number of units issued. As a result, the percentage of float short for ETFs may be more volatile than for stocks.

Larry MacDonald also writes at Investing Journey.

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