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.
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.”
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.
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).
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.
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.