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Stock markets are rallying strongly in January.

Which Canadian stocks are attracting substantial short interest during this bullish upswing? Such bearish bets are exhibiting a high degree of conviction that shouldn’t be dismissed lightly by shareholders in the targeted companies.

The table below displays the 20 most heavily shorted companies, as proxied by the percentage of outstanding shares on loan (short sellers need to borrow shares first before selling them). A high level of insider selling – denoted by negative entries in the insider transactions column – provides further confirmation of the bearish sentiment. Conversely, insider buying dilutes the bearish signal.

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The column for days to cover shows how many days it would take short sellers to buy enough shares to close out their positions (at the average daily trading volumes of the past 30 days). The more days it takes to cover short positions, the more likely good news could trigger an upward spike in share price as short sellers rush to close out their positions. This event is often called a “short squeeze.”

The top 20 Canadian companies with the highest percentage of shares short (as of Jan. 21)

Company Sector % of shares on loan Days to cover Insider transactions (past year)
Laurentian Bank of Canada LB-T Banks 30.60% 31.8 $543,281
First Majestic Silver Corp FR-T Materials 22.80% 55.2 -$2,667,448
Genworth MI Canada Inc MIC-T Banks 13.10% 54.3 -$9,393,592
Prairiesky Royalty Ltd PSK-T Energy 12.30% 47.6 $1,094,539
Canadian Western Bank CWB-T Banks 12.00% 32 -$117,106
Home Capital Group Inc HCG-T Banks 11.80% 18 $1,620,050
Aurora Cannabis Inc ACB-T Marijuana 10.50% 7 -$50,868,368
Badger Daylighting Ltd BAD-T Capital Goods 10.30% 15.6 $2,590,111
Aphria Inc APHA-T Marijuana 10.00% 2.9 -$4,665,229
Paramount Resources Ltd POU-T Energy 9.90% 24.3 -$289,445
Pretium Resources Inc PVG-T Materials 9.80% 16.7 -$6,044,344
Exchange Income Corp EIF-T Transportation 9.70% 30.9 $47,006
CES Energy Solutions Corp CEU-T Energy 9.20% 53.5 -$3,510,951
Intertape Polymer Group Inc ITP-T Materials 9.10% 27.8 -$1,501,628
Canopy Growth Corp WEED-T Marijuana 8.90% 10.6 -$173,038,675
Sleep Country Canada Inc ZZZ-T Retailing 8.80% 24.4 -$14,880,068
Norbord Inc OSB-T Materials 7.80% 17.1 -$3,512,400
Just Energy Group Inc JE-T Utilities 7.80% 28.3 $1,002,922
Kelt Exploration Ltd KEL-T Energy 7.70% 9.9 -$1,939,509
Sandstorm Gold Ltd SSL-T Materials 7.50% 27.6 -$2,894,405

Source: IHS Markit and INK Research

Entries in the days-to-cover column of the table are on the high side (one rule of thumb says readings above 10 are in the risk zone). If the market rally continues, some short squeezes could potentially occur. About the only stocks with low days-to-cover numbers are in the marijuana group.

Laurentian Bank of Canada tops the table for the fourth month in a row and has a short position that is at its highest level. Laurentian Bank’s workforce is unionized, and management is trying to reach an agreement with the union to provide more online services to customers. Just about every other bank in North America is non-unionized and so has greater flexibility in pursuing growth opportunities.

Laurentian Bank is undiversified outside of Quebec, and has had some past issues with its mortgages. Earnings are reportedly flat – thanks, in part, to the absence of a wealth management business. On the positive side, there is insider buying, low valuation and a dividend paying nearly 6 per cent.

Specialty excavating firm Badger Daylighting Ltd., a long-time resident on the table of most shorted companies, may be coming out of the doghouse. Its short position is smaller this month, and insider buying is increasing on a rising stock price.

The next table lists Canadian companies that have been targeted in recent years by activist short sellers (individuals or companies that release strong-sell reports and/or give negative opinions in media interviews). Not all the short positions in the table are necessarily still open.

Most of the activist short sellers on the table are companies whose primary focus is short selling. The exception is an individual, Marc Cohodes, an ex-hedge fund manager and poultry farmer. But it appears he may have recently said “goodbye to the wear and tear of life as a short seller,” according to a December Institutional Investor article entitled Farewell to Short Selling.

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Canadian companies targeted by activist short sellers in recent years

Short seller Company Sector
Hinderburg Research Liberty Health Sciences Inc LHS-T Marijuana
Hinderburg Research Aphria Inc. APHA-T Marijuana
Citron Research Cronos Group Inc CRON-T Marijuana
Spruce Point Capital Dollarama Inc. DOL-T Retail
Muddy Waters Manulife Financial Corp MFC-T Insurer
Citron Research Namaste Technologies N-X Marijuana
Citron Research Tilray Inc TLRY-Q Marijuana
Viceroy Research Pretium Resources Inc. PVG-T Mining
Citron Research CV Sciences Inc CVSI-T Marijuana
Spruce Point Capital Maxar Technologies Ltd. MAXR-T Technology
Citron Research Shopify Inc. SHOP-T E-commerce
Spruce Point Capital Ballard Power Systems Inc. BLDP-T Fuel cell
Muddy Waters Asanko Gold Inc. AKG-T Resources
Citron Research Aurora Cannibus ACB-T Marijuana
Marc Cohodes Badger Daylighting Ltd. BAD-T Construction
Spruce Point Capital TS03 Inc. TOS-T Healthcare
Marc Cohodes Equitable Group Inc. EQB-T Mortgages
Marc Cohodes Home Capital Group HCG-T Mortgages
Marc Cohodes/Spruce Point The Intertain Group Ltd. ITX-T Online casinos
Marc Cohodes Exchange Income Corp EIC-T Aerospace
Marc Cohodes and others Concordia International (1) CXR-T Pharma
Marc Cohodes and others Valeant Pharmaceuticals Inc. (2) VRX-T Pharma

1. Name changed to Advanz Pharma (ADVZ); 2. Name changed to Bausch Health Co. (BHC)

Marijuana firm Aphria Inc. is one of the more recent targets.

In early December, Hindenburg Research and Quintessential Capital Management released a sell report on the company. It claimed that company insiders were diverting shareholder funds into their personal accounts by using secretive shell companies to acquire stakes in corporate entities, and then selling them to Aphria at huge profits.

However, short seller Citron Research released a strong buy recommendation on Aphria a few weeks later, noting that the company still had substantial operations, research facilities, growing revenues and valuable partnerships, particularly an exclusive distribution agreement with Southern Glazer (largest spirit distributor in North America). So, with its U.S. listing and relatively inexpensive stock price, Citron believed Aphria was a prime candidate for forming a partnership with a consumer-products company.

The next table looks at the 20 largest increases in the dollar value of short positions. Many large-cap companies will necessarily appear on this table but this can be useful 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 tend not to have a high percentage of shorted shares (since the number of their shares outstanding is very large).

20 largest increases in dollar value of short positions (over 30 days to Jan. 21)

Company Sector Change in $ value of short position from 30 days ago ($-millions)
Bank Of Nova Scotia BNS-T Banks $757.10
Canopy Growth Corp WEED-T Marijuana $375.70
Canadian National Railway Co CNR-T Transportation $287.50
Bank Of Montreal BMO-T Banks $246.60
Canadian Natural Resources Ltd CNQ-T Energy $165.20
Aurora Cannabis Inc ACB-T Marijuana $163.20
Nutrien Ltd NTR-T Materials $161.90
Husky Energy Inc HSE-T Energy $145.10
Prairiesky Royalty Ltd PSK-T Energy $130.70
Brookfield Asset Management Inc BAM-A-T Diversified Financials $122.30
Alimentation Couche-Tard Inc ATD-B-T Food Retailing $121.80
Imperial Oil Ltd IMO-T Energy $112.40
Shopify Inc SHOP-T Software & Services $110.50
National Bank Of Canada NA-T Banks $102.50
Shaw Communications Inc SJR-B-T Media $91.90
ARC Resources Ltd ARX-T Energy $76.90
First Quantum Minerals Ltd FM-T Materials $73.00
Premium Brands Holdings Corp PBH-T Food & Beverage $69.80
Laurentian Bank Of Canada LB-T Banks $66.00
H & R Real Estate Investment HR-UN-T Real Estate $62.00

Source: IHS Markit

While the dollar size of a short position may not be too informative in itself, changes and trends can be. On this basis, it’s worth noting the companies that appeared on the table both this and last month. They are (last month’s increase in brackets): Husky Energy Inc. ($60-million), Brookfield Asset Management Inc. ($139-million), Imperial Oil Ltd. ($60-million) and National Bank of Canada ($20-million)

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.

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The 20 most expensive shares to borrow (as of Jan. 14)

Company Sector Cost to borrow (annualized)
Jaguar Mining Inc. JAG-T Resources 108.90%
Prometic Life Sciences Inc. PLI-T Biopharma 81.50%
IntelliPharmaCeutics Intl. Inc. IPCI-T Movie chain 78.20%
Ballard Power Systems Inc. BLDP-T Fuel cells 76.10%
Leading Edge Materials Corp. LEM-T Resources 49.30%
Aphria Inc. APHA-T Marijuana 45.80%
Street Capital Group Inc. SCB-T Mortgages 44.50%
Titan Medical Inc. TMD-T Marijuana 43.80%
Lithium Americas Corp. LAC-T Resources 40.60%
Resverlogix Corp. RVX-T Biotech 37.80%
Emblem Corp. EMC-T Marijuana 37.40%
Acreage Holdings Inc ACRG-U-T Marijuana 37.10%
Katanga Mining Ltd. KAT-T Resources 35.20%
Australis Capital Inc. AUSA-T Marijuana 32.60%
Namaste Technologies Inc. N-T Marijuana 32.10%
Northern Dynasty Minerals. NDM-T Resources 32.00%
Garibaldi Resources Corp. GGI-T Resources 30.70%
Newstrike Brands Ltd. HIP-T Marijuana 29.80%
Optiva Inc. OPT-T Software 29.10%
Green Organic Dutchman Holdings TGOD-T Marijuana 29.10%

Source: Interactive Brokers

Canadian marijuana company Tilray Inc. has only a listing on a U.S. exchange, so does not appear on the cost-to-borrow table. If it had been included, it would have easily claimed the top spot in recent months, with annualized lending rate as high as 500 per cent.

However, the cost to borrow its shares has plummeted to about 25 per cent as of Jan. 22. This could be due, in part, to an increasing supply of shares resulting from company insiders selling shares following the expiration of the lock-up period for the company’s initial public offering earlier this year.

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