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Inside the Market Short sales on the TSX: What bearish investors are betting against

Bearish sentiment on Canadian stocks recently fell back but is still elevated.

One indication is the trend in the percentage of shares short for the iShares S&P/TSX 60 exchange-traded fund (XIU). After a sharp run-up from September, the percentage retreated during the past month – but with the help of a small uptick it remains at a high level, near 10 per cent.

Trend in percentage of shares short for iShares S&P/TSX 60 ETF (Dec. 11)

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Note that the percentage of shares short in the above chart (and elsewhere in article) is not a directly observable measure. It is proxied by the percentage of outstanding shares on loan, as supplied by data-analytics firm IHS Markit. Shares on loan are a good representation of short positions because short sellers need to first borrow shares before selling them.

The 20 most heavily shorted companies are shown in the table below. Also included are data that can help with interpreting short-selling numbers. This is insider transactions and the days-to-cover ratio (the latter indicates the number of days it would take for short sellers to close their positions at the daily trading volumes of the previous 30 days).

Companies with the highest percentage of shares short (Dec. 11)

Company Ticker Sector Percentage of shares shorted Days to cover Insider transactions (12 months)
Laurentian Bank Of Canada LB Banks 28.3% 39 $458,229
First Majestic Silver Corp. FR Materials 23.7% 65 -$3,034,961
Franco-Nevada Corp. FNV Materials 17.5% 64 -$14,607,448
Maxar Technologies Ltd. MAXR Capital Goods 15.5% 12 $5,687,643
Badger Daylighting Ltd. BAD Capital Goods 15.3% 34 $1,102,104
Vermilion Energy Inc. VET Energy 13.9% 20 -$20,211,444
Canadian Western Bank CWB Banks 13.8% 34 -$1,592,234
Genworth MI Canada Inc. MIC Mortgages 13.1% 42 -$9,393,508
Paramount Resources Ltd. POU Energy 11.1% 27 $617,482
Aphria Inc. APHA Marijuana 11.1% 2 -$4,665,229
Prairiesky Royalty Ltd. PSK Energy 10.2% 30 $1,094,539
Keyera Corp. KEY Energy 9.7% 33 -$137,636
Birchcliff Energy Ltd. BIR Energy 9.4% 19 $718,536
Aurora Cannabis Inc. ACB Marijuana 9.3% 4 -$58,391,771
Just Energy Group Inc. JE Utilities 9.1% 33 $962,627
Exchange Income Corp EIF Transportation 9.1% 29 -$904,116
Pretium Resources Inc. PVG Materials 8.8% 32 -$5,985,024
Canopy Growth Corp. WEED Marijuana 8.8% 6 -$184,463,482
Sleep Country Canada Holdings Inc. ZZZ Retailing 8.7% 12 -$14,706,262
Cineplex Inc. CGX Media 8.4% 12 $1,259,169

Source: IHS Markit and INK Research

As in previous months, we see a fair amount of continuity. A majority of the companies on the table this month appeared on previous months’ tables. Many of them were discussed in previous updates.

Maxar Technologies Ltd., a provider of satellite communication services, remains near the top of the table, but it experienced a doubling of insider buying during the past month. On the other hand, the chief operating officer recently resigned and activist short seller Spruce Point Capital Management reiterated its bearish views on Dec. 11.

Another noticeable uptick in insider buying over the past month occurred for excavation-specialist Badger Daylighting Ltd. The company produced strong financial results in recent quarters and its stock has appreciated by nearly a third since late October.

Mortgage-insurer Genworth MI Canada Inc. had a substantial rise in insider selling. Downside risks are global trade uncertainty, oil price weakness and auto sector layoffs. And higher interest rates could trigger more mortgage delinquencies. However, yields on U.S. 10-year Treasury bonds have lately been trending down, from 3.25 per cent to 2.85 percent since early October.

A notable new entry on the table is Franco-Nevada Corp., which provides financing to gold miners in return for royalties and income streams. It leaped onto the table into the third spot with 17.5 per cent of outstanding shares sold short.

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It would take a long time (64 days) for Franco-Nevada’s short sellers to close their positions at current daily trading volumes, so the risk of a short-covering rally is present. However, insiders have sold more than $14-million worth of stock over the past 12 months, which reinforces the bearish signal of the large short position.

Management issued one news release during the past month, disclosing that the Canada Revenue Agency had expanded its audit of the company’s 2012 to 2015 taxation years – and could expand it further. The company doesn’t have any convertible debt that short sellers might be arbitraging.

A November research report issued by TD Securities lowered the brokerage’s target price on the shares of Franco Nevada. A main reason was: “That the precious metal streaming business is in a period of hiatus … producers have not yet entered the project-building phase that would require raising funds via stream sales.”

Aphria Inc. is also new to the table, although it did appear at times on the most expensive stocks to borrow table in 2018. Quintessential Capital Management and Hindenburg Research recently issued a report alleging the company engaged in purchases of "virtually worthless corporate entities” associated with company insiders.

The next table highlights the largest increases in the percentage of shares short for companies with market capitalizations greater than $500 million. Franco-Nevada Corp. is at the top, and was discussed above. Second highest was Canadian Utilities Ltd., a provider of gas and electricity services. The share price of this Alberta-centric, interest-sensitive company has declined by more than 15 per cent over the past 12 months.

Largest increase in the percentage of shares short (as of Dec. 11)

Company Ticker Sector Increase in percentage of shares short
Franco-Nevada Corp. FNV Materials 17.3%
Canadian Utilities Ltd. CU.X Utilities 13.2%
Royal Bank Of Canada preferred shares RY.PR.Q Banks 7.8%
TransCanada Inc. preferred shares TRP.PR.K Energy 6.6%
Curaleaf Holdings Inc. CURA Marijuana 6.2%
Summit Industrial Income REIT SMU.UN Real Estate 5.1%
Enbridge Inc. preferred shares ENB.PF.I Energy 4.8%
Charlotte's Web Holdings Inc. CWEB Marijuana 4.1%
Largo Resources Ltd. LGO Materials 3.6%
Sprott Physical Silver Trust PSLV.U Materials 3.6%
Stars Group Inc. TSGI Consumer Services 3.1%
Sprott Physical Gold Trust PHYS.U Materials 2.4%
IA Financial Group Inc. IAG Insurance 2.2%
Green Organic Dutchman Holdings Ltd. TGOD Marijuana 2.0%
Bombardier Inc. BBD.B Capital Goods 1.7%
Mitel Networks Corp. MNW Technology Hardware 1.5%
CAE Inc. CAE Capital Goods 1.5%
Canadian Natural Resources Ltd. CNQ Energy 1.4%
Fortuna Silver Mines Inc. FVI Materials 1.4%
Boyd Group Income Fund BYD.UN Commercial Services 1.2%

The table below looks at the 20 largest increases in the dollar value of short positions. A bountiful crop of large-cap companies is the result, but this provides a useful picture for investors interested in bearish sentiment among large-cap companies. They would not get a sense of this from rankings of the percentage of shares short because large-cap companies have huge floats that tend to leave the percentage short at low levels.

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Largest increase in dollar value of short positions (30 days to Dec. 12)

Company Ticker Sector Change in $ value of short position from 30 days ago (millions)
Franco-Nevada Corp. FNV Materials $1,031.80
Barrick Gold Corp. ABX Materials $303.10
Brookfield Asset Management Inc. BAM-A Financial $139.10
Toronto-Dominion Bank TD Banks $108.10
CIBC CM Banks $82.10
SNC-Lavalin Group Inc. SNC Capital Goods $71.90
Sun Life Financial Inc. SLF Insurance $62.40
Imperial Oil Ltd. IMO Energy $60.30
Husky Energy Inc. HSE Energy $60.30
Bombardier Inc. BBD-B Capital Goods $54.20
TransCanada Corp. TRP Energy $54.10
Intact Financial Corp. IFC Insurance $50.40
Loblaw Companies Ltd. L Food Retailing $46.30
Great Canadian Gaming Corp. GC Consumer Services $37.40
Canadian Tire Corporation Ltd. CTC-A Retailing $30.20
Stars Group Inc. TSGI Consumer Services $27.10
Largo Resources Ltd. LGO Materials $25.10
Vermilion Energy Inc. VET Energy $23.60
CAE Inc. CAE Capital Goods $22.60
National Bank Of Canada NA Banks $20.60

Source: IHS Markit

The top two positions on the above table went to gold mining companies. A factor here could be strength in the U.S. dollar in 2018. Since it is the currency that the price of gold is quoted internationally, dollar strength makes it harder for non-U.S. citizens to buy gold.

The following table shows the top 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 Dec. 12)

Company Ticker Sector Cost to borrow (annualized)
Titan Medical Inc. TMD Marijuana 69.0%
Curaleaf Holdings Inc. CURA Marijuana 51.2%
Lithium Americas Corp. LAC Mining 46.6%
Green Organic Dutchman Holdings TGOD Marijuana 45.9%
Cronos Group Inc. CRON Marijuana 44.0%
Katanga Mining Ltd. KAT Mining 43.4%
Aeterna Zentaris Inc. AEZS Pharma 41.9%
Antibe Therapeutics Inc. ATE Pharma 41.2%
Eastmain Resources Inc. ER Mining 38.0%
Resverlogix Corp. RVX Biotech 37.9%
Zargon Oil & Gas Ltd. ZAR Energy 35.0%
Havilah Mining Corp. HMC Mining 34.8%
Supreme Cannabis Co Inc. FIRE Marijuana 34.8%
MCAN Mortgage Corp. MKP Mortgages 34.5%
Aurcana Corp. AUN Mining 29.3%
Drone Delivery Canada Corp. FLT Tech 28.1%
Acasti Pharma Inc. ACST Pharma 27.7%
Emerald Health Therapeutics EMH Marijuana 27.2%
Khiron Life Sciences Corp. KHRN Marijuana 27.2%
Organigram Holdings Inc. OGI Marijuana 27.2%

Source: Interactive Brokers

Earlier in 2018, this table was filled with a lot of marijuana companies, nearly half of the entries at one point. The numbers dwindled as the year progressed but this month, there was a jump up, to 8 companies. Tilray Inc., based in Nanaimo, B.C., would have been the 9th marijuana company if it was listed on an exchange in Canada instead of in the United States (indeed, it would have been at the top given borrowing rates for its shares are close to 100 per cent).

Cronos Group Inc. was under attack by short-selling firm Citron Research earlier in 2018. But in December, tobacco giant Altria Group Inc. announced that it was investing $2.4 billion (U.S.) in the company, producing a dramatic rebound in its stock price.

A brand new entry on the table is Drone Delivery Canada Corp. There are a lot of hurdles to overcome before this company can become viable, including regulatory rulings regarding the use of air space. That said, management just announced its first revenue-generating contract – a $2.5-million deal with the Moose Cree First Nation living in an island community up north.

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