Finance professors have found that short sellers are informed traders. One of the more recent academic studies, published by Professor Ekkehart Boehmer and co-authors in The Review of Financial Studies, concluded “that the short sellers in our sample countries are, on average, informed about future stock returns.”
So, what did short sellers tell us about stocks trading on the Toronto Stock Exchange in June?
Let’s start with the 20 most shorted companies by percentage of float sold short (data supplied by S3 Partners). At the top is Canada Goose Holdings (GOOS-T), with 26.3 per cent of its float short. This is a much lower reading than in May but still high enough to be the most shorted stock by this metric in June – likely for the same reasons provided last month in “Short sales on the TSX.”
Next highest is CI Galaxy Bitcoin ETF (BTCX-B-T), with 25.8 per cent of float short. Short sales for this cryptocurrency ETF have risen steadily since March, when they were only 13.3 per cent. There has been a fair amount of negative news for the sector in recent months – for example, the U.S. Securities and Exchange Commission laid charges in early June against Coinbase and Binance.
Another development is the drop in Canopy Growth Corp.’s (WEED-T) short position to 12.9 per cent, down from 15.7 per cent in May. Its stock has depreciated 99 per cent since early 2021 and is currently trading close to 50 cents, so short sellers may be unwinding their bets to avoid holding into a delisting (which can freeze their positions and incur borrowing costs until the company is liquidated). On the other hand, some long-time short sellers of cannabis stocks, such as Toronto-based Anson Funds, have been pivoting to long positions in the sector on speculation recreational cannabis will be legalized at the federal level in the United States.
When short seller sentiment becomes extremely bearish on a stock, the risk of a short squeeze is increased. Candidates from the June list for this risk are: Lion Electric Co (LEV-T) (high cost to borrow: 27 per cent), Great-West Lifeco (GWO-T) (high days-to-cover ratio: close to 800) and Peyto Exp. & Dev Corp. (PEY-T) (high days-to-cover ratio: above 200).
Next, let’s take a look at the 20 largest short positions by dollar value. TD Bank (TD-T) retains the top spot with short interest totaling $5.2-billion. The short position has been in a downtrend since December, when it stood at $7.1-billion. It appears that nervousness over the collapse of Silicon Valley Bank and other U.S. regional banks earlier in 2023 is dissipating.
We can also check out the 20 largest increases and decreases in short positions over the past month. As for the largest increase, Shopify (SHOP-T) claimed top spot with a jump of $757.8-million. It jumped by a similar amount the month before, for a two month increase of $1.5-billion in short sales. Valuation has likely become a concern again following the near doubling in its share price over the past year.
Finally, activist short seller J Capital Research issued a report in late June on its short sale of a Canadian lithium miner listed on the TSX Venture Exchange.
Methodological notes:
1) Some short positions may reflect, in part or whole, hedging/arbitrage positions – so they are not entirely bearish bets; if bearish sentiment is extreme, it can sometimes trigger a short squeeze that sends the stock price higher.
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 mechanism for creating/redeeming units, which results in almost daily changes in the number of units issued. The percentage of float short for ETFs may thus be more volatile than for stocks.
Larry MacDonald also writes at Investing Journey
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