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

Despite the sharp rally in TSX stocks since Christmas, short sellers’ bets as of mid-February remain elevated. This should be a concern for market participants, given academic research has found that heavily shorted equities tend to underperform over time.

One indication of the extent of bearishness is the short position in the iShares S&P/TSX 60 Index exchange-traded fund. For this, we can look at the number of shares on loan, as short sellers need to borrow stocks in order to sell them short.

Although lower than the December peak, shares on loan currently stands close to 10 per cent of the ETF’s shares. This is still a relatively high level, and may come as a bit of a surprise considering the vigour of the recent rebound in stock markets.

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One short seller digging in its heels is Crescat Capital, a top performing hedge fund in 2018. Several of its macro bets, including those on Canadian banks, are based on the thesis that the bursting of the credit bubble in China will trigger a downturn in the global economy. As noted in its fourth-quarter letter to clients:

“Our macro model is telling us that the bull market has finally topped out for this cycle and that the economy will soon follow. The [tide of] central bank liquidity is going out while equities, fixed income, real estate and illiquid private assets have all recently reached historic high valuations.”

Of course, even the smartest of money managers will not always be right. But their views are worth considering if only to remind investors to keep risk at acceptable levels through techniques such as portfolio rebalancing.

On the individual stock level, a number of companies are attracting substantial short interest in February. Let’s take a look at some of the cases with the help of the following table. It lists 20 of the most heavily shorted Canadian companies, determined by the percentage of outstanding shares on loan. Market-intelligence firm IHS Markit gathers the data daily from industry participants around the world, including prime brokers, custodians and asset managers.

20 Canadian companies with the highest percentage of shares short

CompanyTickerSectorPercentage of shares on loanDays to coverInsider transactions (past year)
Peyto Exp. & Dev. Corp.PEY-T Energy30.2%45.9($1,907,443)
Laurentian Bank Of CanadaLB-T Banks28.8%37.8$543,281
First Majestic Silver Corp.FR-T Materials21.8%79.1($2,446,598)
Genworth MI Canada Inc.MIC-T Banks13.6%51.2($6,136,945)
Pretium Resources Inc.PVG-T Materials13.2%29.8($6,405,022)
Canadian Western BankCWB-T Banks12.6%45.9($64,839)
PrairieSky Royalty Ltd.PSK-T Energy11.9%60.2$1,094,539
Home Capital Group Inc.HCG-T Banks10.5%23.9$1,519,040
Encana Corp.ECA-T Energy10.3%11.3$4,898,869
Sleep Country Canada HoldingsZZZ-T Retailing9.9%34.1($14,880,068)
Badger Daylighting Ltd.BAD-T Capital Goods9.5%19.4$2,590,111
Exchange Income Corp.EIF-T Transportation9.5%42.3$47,006
Aurora Cannabis Inc.ACB-TMarijuana9.4%4.9($50,868,741)
SNC-Lavalin Group Inc.SNC-T Capital Goods9.0%19.2$591,349
Aphria Inc.APHA-TMarjuana8.4%2.7($4,665,229)
CES Energy Solutions Corp.CEU-T Energy8.2%52($3,510,951)
Sandstorm Gold Ltd.SSL-T Materials8.2%31.4($2,894,405)
Just Energy Group Inc.JE-T Utilities8.2%47.2$1,002,922
Alaris Royalty Corp.AD-T Div. Financials8.2%21.2$492,821
Paramount Resources Ltd.POU-T Energy8.0%32.3($1,661,201)

Data as of Feb. 18, 2019. Source: IHS Markit  and INK Research

Shooting to the top of the table this month is natural-gas producer Peyto Exploration & Development Corp. The Canadian natural-gas industry is in survival mode as a lack of pipeline capacity curtails sales to foreign markets and bottles up supply in Canada, resulting in depressed domestic prices. Peyto recently slashed its dividend and capital expenditures to free up capital for a diversification effort into midstream opportunities, including gas storage.

Precious metals miner Pretium Resources Inc. saw a jump in its short position to 13.2 per cent of shares, up from 9.8 per cent in January. Short-selling firm Viceroy Research has had a sell recommendation on the company since September, and in a Jan. 10 report reiterated its thesis that the company’s primary development project, the Brucejack gold mine, was likely to disappoint on ore grades and production metrics.

The short position in Badger Daylighting Ltd. continues to dwindle, falling to 9.5 per cent of shares in February compared to a high of 25 per cent in April, 2018. As well, insider buying in the specialty excavating firm has climbed in recent months, as its stock price rose.

It’s perhaps no surprise that construction firm SNC-Lavalin Group Inc. makes an appearance on the table given the recent scandal involving alleged political interference to avert a court ruling that could ban the company from bidding on federal contracts. There has been insider buying of shares but it occurred well before the scandal broke.

Be aware that large short positions can also foreshadow a “short squeeze” – an upward spike in share price caused by short sellers rushing to buy shares to close out their positions. In the above table, the stocks most at risk are those with high levels of insider buying and days-to-cover ratios above 10 (it would take short sellers more than 10 days, at the average daily trading volume of the previous 30 days, to buy the shares needed to close out their positions). Included in this group are PrairieSky Royalty Ltd., Badger Daylighting Ltd. and Just Energy Group Inc.

The next table looks at the 20 largest increases in the dollar value of short positions. Many large-cap companies will appear on this table but this can be useful for investors interested in bearish sentiment among that group. They would not get a sense of this from rankings of the percentage of shares short because large-cap companies do not usually have a high percentage of shorted shares given that their number of outstanding shares is very large.

Largest increase in dollar value of short position

CompanyTickerSectorChange in short position from 30 days ago (US$Mil)
Bank of MontrealBMO-T Banks$502.8
Encana Corp.ECA-T Energy$414.7
Toronto-Dominion BankTD-T Banks$353.5
Manulife Financial Corp.MFC-T Insurance$343.8
Nutrien Ltd.NTR-T Materials$251.6
First Quantum Minerals Ltd.FM-T Materials$239.8
Suncor Energy Inc.SU-T Energy$238.2
Rogers Communications Inc.RCI.B-T Telecom$215.8
Royal Bank of CanadaRY-T Banks$153.2
Pembina Pipeline Corp.PPL-T Energy$142.1
Telus Corp.T-T Telecom$133.9
Shopify Inc.SHOP-T Software & Svcs$89.9
Constellation Software Inc.CSU-T Software & Svcs$83.8
Wheaton Precious Metals Corp.WPM-T Materials$83.6
Canada Goose Holdings Inc.GOOS-T Cons. Apparel$82.1
Cronos Group Inc.CRON-TMarijuana$76.7
National Bank of CanadaNA-T Banks$72.3
Goldcorp Inc.G-T Materials$64.5
Pretium Resources Inc.PVG-T Materials$58.5
Canadian National Railway Co.CNR-T Transportation$56.8

Data for the 30 days to Feb. 18; Source: IHS Markit

Trends in the dollar value of short positions can be informative, so it’s worth highlighting companies that appeared on the table both this month and last month. They are (last month’s increase in brackets): Bank of Montreal ($246-million), First Quantum Minerals Ltd. ($73-million), Shopify Inc. ($110.5-million), National Bank of Canada ($102.5-million) and Canadian National Railway Co. ($287.5-million). None of these companies were on the table two months ago.

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The following table shows the top companies in terms of the cost to borrow 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 bidding up borrowing costs rather than the number of shares borrowed.

The 20 most expensive shares to borrow 

CompanyTickerSectorCost to borrow (annualized)
New Millennium Iron Corp.NML-TMining109.9%
Global Cannabis ApplicationsAPP-TMarijuana107.9%
Titan Medical Inc.TMD-TMarijuana106.1%
Tanzanian Royalty ExplorationTNX-TMining102.2%
Mega Uranium Ltd.MGA-TMining84.3%
Prometic Life Sciences Inc.PLI-TPharma84.0%
Cathedral Energy Services Ltd.CET-TEnergy74.5%
Midas Gold Corp.MAX-TPrecious Metals47.1%
Australis Capital Inc.AUSA-TMarijuana 43.4%
Lithium Americas Corp.LAC-TMining41.5%
Street Capital Group Inc.SCB-TMortgages40.7%
Minera Alamos Inc.MAI-TMining39.4%
Resverlogix Corp.RVX-TBiotech37.8%
Zargon Oil & Gas Ltd.ZAR-TEnergy34.4%
Petrus Resources Ltd.PRQ-TMining33.6%
Katanga Mining Ltd.KAT-TMining33.6%
TSO3 Inc.TOS-TMedical 32.6%
Eastmain Resources Inc.ER-TMining32.6%
Auxly Cannabis Group Inc.XLY-TMarijuana32.0%
Sintana Energy Inc.SEI-TEnergy32.0%

Data as of Feb. 18.  Source: Interactive Brokers

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