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Earnings season is upon us and companies are now reporting their financial results for the quarter ending June 30. This makes things a little more interesting for those of us who follow short-selling activity because academic studies have found that a rising short position ahead of a financial report portends bad news and an adverse impact on the stock price.

One of the seminal papers in this regard is “Short-Selling Prior to Earnings Announcements” published by Stephen E. Christophe and co-authors in the Journal of Finance. Note that the professors conclude there is only a tendency, not a certainty, for the inverse relationship to hold between short sales and the impact of quarterly reports. Nor does the scholarly literature have a complete consensus on the matter.

For most investors, the decision to buy or sell a stock will be based on several variables, not on any single one such as a short sales signal. However, if one is close to a decision after considering a variety of factors, a short sale signal could be a tipping point.

The following two tables are for the largest 1-month increases and decreases, respectively, in July short positions by dollar value (data provided by S3 Partners). Perhaps it’s worth checking if any of the companies have earnings reports coming out soon. Interestingly, for example, Shopify’s (SHOP-T) short position declined in July and second-quarter earnings are scheduled for Aug 2. The short position had declined ahead of the first-quarter financial results as well, and when the report was released in early May, it triggered a sharp move upward in the stock price.

Largest 1-month increases in short positions (July 25)

Toronto-Dominion BankTD-T$1,228.320.2%4.6%
TC Energy CorpTRP-T$862.216.9%11.4%
Ovintiv IncOVV-T$376.872.3%6.7%
Enbridge IncENB-T$152.63.5%4.5%
Tourmaline Oil CorpTOU-T$132.289.1%1.3%
Boardwalk REITBEI-UN-T$101.360.1%10.9%
Gibson EnergyGEI-T$82.756.3%7.7%
Barrick Gold CorpABX-T$79.15.6%3.7%
Canada Goose HoldingsGOOS-T$65.120.4%32.0%
Wheaton Precious MetalsWPM-T$62.96.9%3.7%
Bank Of MontrealBMO-T$54.61.9%3.4%
Brookfield Asset Mgmt ABAM-T$51.512.0%2.8%
Power Corp CanadaPOW-T$48.59.8%2.6%
Arc Resources LtdARX-T$48.213.0%3.6%
Meg Energy CorpMEG-T$47.116.8%4.9%
TMX Group LtdX-T$46.977.6%1.3%
Great-West LifecoGWO-T$45.65.1%8.5%
Whitecap ResourcesWCP-T$44.034.2%2.8%
West Fraser Timber CoWFG-T$43.638.6%2.5%
Athabasca Oil CorpATH-T$41.927.4%9.8%

Data Source: S3 Partners

Largest 1-month decreases in short positions (July 25)

Canadian Natural ResourcesCNQ-T-$1,085.4-22.6%4.5%
Suncor EnergySU-T-$884.2-37.5%2.9%
BCE IncBCE-T-$654.1-29.6%2.9%
Shopify IncSHOP-T-$493.7-12.5%3.5%
Thomson Reuters CorpTRI-T-$312.5-35.3%2.2%
Bank of Nova ScotiaBNS-T-$260.8-6.2%4.9%
Pembina Pipeline CorpPPL-T-$246.6-17.9%4.9%
Manulife FinancialMFC-T-$244.8-12.8%3.5%
CP Kansas City LtdCP-T-$211.5-8.8%2.2%
Emera IncEMA-T-$142.9-18.2%4.3%
Baytex Energy CorpBTE-T-$137.4-59.5%2.9%
National Bank Of CanadaNA-T-$133.9-13.2%2.6%
Teck Resources Ltd BTECK-B-T-$105.8-12.1%2.7%
Lululemon Athletica IncLULU-N-$93.0-6.5%2.4%
Dollarama IncDOL-T-$86.2-19.8%1.4%
Fortis IncFTS-T-$83.2-7.8%3.5%
CGI IncGIB-A-T-$79.6-20.4%1.1%
Sun Life FinancialSLF-T-$75.6-6.2%2.8%
Waste ConnectionsWCN-T-$70.3-9.5%1.4%
Brookfield RenewableBEP-UN-T-$67.1-53.2%0.5%

Data Source: S3 Partners

On the “20 most shorted companies by percentage of float” table, the number of cryptocurrency ETFs jumped to four. They were: CI Galaxy Bitcoin ETF (BTCX-B-T: 23.4 per cent), Purpose Ether ETF (ETHH-B-T: 17.1 per cent), Bitcoin ETF (EBIT-T: 16.3 per cent) and Purpose Bitcoin ETF (BTCC-B-T: 11.3 per cent).

20 most shorted companies by percentage of float (July 25)

Canada Goose HoldingsGOOS-T32.0%
CI Galaxy Bitcoin ETFBTCX-B-T23.4%
iShares S&P/TSX 60 ETFXIU-T22.3%
Purpose Ether ETFETHH-B-T17.1%
Bitcoin ETFEBIT-T16.3%
Ballard Power SystemsBLDP-T14.9%
Energy Fuels IncEFR-T14.9%
Meta Materials IncMMAT-Q14.7%
Bausch Lomb CorpBLCO-T13.7%
Li-Cycle Holdings CorpLICY-N12.9%
AbCellera Biologics IncABCL-Q12.7%
Tilray Brands IncTLRY-T12.6%
Canopy Growth CorpWEED-T12.2%
Tucows IncTC-T12.0%
Lions Gate Entertainment-ALGF-A N12.0%
Aurinia Pharmaceuticals IncAUPH-Q11.9%
TC Energy CorpTRP-T11.4%
Dream Office REITD-UN-T11.4%
Purpose Bitcoin ETFBTCC-B-T11.3%
Gran Tierra Energy IncGTE-T11.2%

Data Source: S3 Partners

While short sellers appear to be turning more bearish on the crypto sector, there still appears to be some bullish sentiment among investors and speculators. In particular, the four crypto ETFs are showing year-to-date price gains ranging from 35 per cent to 70 per cent.

However, negative news continues to plague the sector. Of note, regulators and academics are now alleging that crypto exchanges are inflating trading to encourage speculation. As the Wall Street Journal reported July 24: “Over 70% of trading volume on crypto exchanges came from wash trading, according to a study that will be published in the journal Management Science.”

When short seller sentiment becomes very bearish on a stock, the risk of a short squeeze rises. Two candidates from the “20 most shorted companies by percentage of float” table in July are: Meta Materials Inc. (MMAT-Q) and Canopy Growth Corp. (WEED-T) – the cost to borrow their shares was above 25 percent. Two other candidates are Dream Office REIT (D-UN-T) and Gran Tierra Energy Inc. (GTE-T) because of their very high days-to-cover ratios.

Data analytics firm Breakout Point reports that only three Canadian companies were targeted during the first half of 2023 by activist short sellers (the latter engage in short selling and disseminate bearish views on companies). This is considerably lower than the first half of 2022, when six Canadian companies were targeted.

Canadian companies targeted by activist short sellers in the first half of 2023

CompanyTicker Release DateShort Seller
Sigma Lithium CorpSGML-X21-MarGrizzly Research
Nuvei Corp.NVEI-T18-AprSpruce Point Capital
American Lithium Corp.AMLI-Q27-JunJ Capital
Patriot Battery Metals Inc.PMET-X6-JulNight Market Capital

Data source: Breakout Point

Nuvei Corp.’s (NVEI-T) short seller, Spruce Point Capital, set a target price 35 per cent lower from the price quoted on the date its research report was published. This price target was reached by early June. Since then, however, the shares in the Montreal-based payments processor have recouped about half of their drop.

On July 6, just after the first half of 2023 ended, lithium miner Patriot Battery Metals Inc., (PMET-X) was the subject of a negative research report from an activist seller. This brings to three the number of Canadian lithium miners targeted by activist short sellers in 2023 so far.

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.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/05/24 3:59pm EDT.

SymbolName% changeLast
CI Galaxy Bitcoin ETF
Purpose Ether Non-Cur Hedg ETF
Shopify Inc
Bitcoin ETF
Purpose Bitcoin ETF [Cad ETF Non-Currenc
Meta Materials Inc
Canopy Growth Corp
Dream Office REIT
Gran Tierra Energy Inc
Nuvei Corp

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