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With Canadian stocks up more than 15 per cent in 2019 and outperforming nearly all other markets around the world, losses among short sellers in Canada now tally in the billions of dollars for the year.

But the shorts remain unbowed: their bearish bets on Canadian equities recorded a net increase of $1.3-billion over the past 30 days to bring the total to $73.4-billion, according to data-analytics firm S3 Partners.

The net increase of $1.3-billion in short sales resulted from a mix of increases and decreases at the sector level. The energy sector had the biggest increase over the month, noted S3 Partners. One reason could be that insufficient export infrastructure has bottled up oil-and-gas supplies in Canada and put downward pressure on domestic prices and balance sheets.

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The sector with the next biggest increase was finance. There may be some concerns that the credit cycle is at a turning point following the recent softening in Canadian real estate (as highlighted by the 1.7-per-cent decline over the past 8 months in the Teranet–National Bank House Price Index).

The biggest declines occurred in the mining and information-technology industries.

One might have expected escalating global trade wars to have raised short sales in these exporting sectors. Or perhaps the shorts were anticipating the recent news that U.S. tariffs were being removed on Canadian steel and aluminum – which paves the way for a new North American Free Trade Agreement.

The following table shows the 20 companies most targeted by short sellers on the basis of the percentage of float sold short. Float is defined as shares available for trading (not held by long-term investors such as employee stock ownership plans). Also, trading in Canadian companies on U.S. exchanges is included in the counts (after converting to Canadian dollars).

Borrow fees are shown on the table. Short sellers have to first borrow shares in order to sell them short; borrow fees represent the annualized cost they pay to borrow the shares. The fees provide another indication of bearish sentiment: high rates are a sign of heightened demand to go short.

The top 20 companies with the highest percentage of shares short (as of May 14)

% of shares shortBorrow fee (annualized)
Home Capital Group Inc.HCG-T22.40%2.60%
Tilray Inc.TLRY-Q21.40%13.90%
Paramount ResourcesPOU-T21.10%8.90%
Genworth MI Canada Inc.MIC-T20.40%0.90%
First Majestic Silver Corp.FR-T17.60%1.70%
iShares S&P/TSX 60 ETFXIU-T17.10%0.30%
Great-West LifecoGWO-T16.20%0.30%
Seabridge GoldSEA-T16.20%2.60%
Cronos GroupCRON-T15.90%7.60%
Westshore Terminals Investment Corp.WTE-T15.50%0.30%
Canopy Growth Corp.WEED-T15.40%8.90%
Laurentian Bank of CanadaLB-T15.40%1.20%
Exchange Income Corp.EIF-T14.50%28.40%
Canada Goose HoldingsGOOS-T14.10%0.70%
Aurora Cannabis Inc.ACB-T13.90%33.10%
Village Farms InternationalVFF-T13.60%25.10%
Peyto Exploration & Development Corp.PEY-T13.40%0.30%
Tucows Inc. ATC-T12.50%1.40%
Horizons S&P/TSX 60 Index ETFHXT-T12.20%0.30%
Badger DaylightingBAD-T12.10%5.40%

Source: S3 Partners

U.S. trades for interlisted stocks are included in calculations (after converting to C$); percentage of shares short is number of shares short / number of available for trading (float); borrow fee is cost to borrow shares for selling short

We can see several smaller financial intermediaries on the table. They share a connection to the housing sector. Home Capital Group provides mortgages to persons whose credit profiles may not meet the requirements of the big banks, Genworth MI Canada Inc. is a private insurer of mortgages and Laurentian Bank is a small bank that had mortgage-origination issues in the past.

The table also includes several cannabis firms: Tilray Inc., Cronos Group, Canopy Growth Corp., Aurora Cannabis Inc. and Village Farms International. Activist short sellers are waging public campaigns against the rich valuation of these firms. The demand to short their shares remains very strong as indicated by borrow fees ranging from 8.9 per cent to 33.1 per cent.

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As more states in the U.S. legalize recreational cannabis, U.S. suppliers are becoming larger and could emerge as rivals to Canadian suppliers down the road. Furthermore, the removal of prohibitions at the U.S. federal level would give U.S. firms better access to financing and scale economies. Measure 8 Venture Partners plans to launch a hedge fund that goes long U.S. firms and short Canadian producers.

The companies on the above table tend to come from the middle ranks of corporate Canada. Not too many of the big companies in the energy, banking and other sectors appear on it because their floats are so huge that they dwarf the positions of short sellers and keep the percentage short at low levels. The next table gives bigger companies more play by looking at changes in the dollar value of short positions.

Top 20 companies with largest increase in short position (as of May 14)

Short interest as of May 14 ($million)1-month change ($million)% change over the month
Enbridge Inc.ENB-T 4,450.8 $1,101.432.90%
TransCanada Corp.TRP-T 3,033.9 $402.315.30%
Manulife FinancialMFC-T 916.9 $336.958.10%
Canopy Growth Corp.WEED-T 2,078.7 $300.216.90%
CIBCCM-T 3,059.6 $209.77.40%
Canadian National ResourcesCNQ-T 627.0 $193.544.60%
CP RailwayCP-T 533.5 $186.353.60%
Bank of MontrealBMO-T 1,349.3 $183.615.80%
Bank of Nova ScotiaBNS-T 3,058.8 $157.35.40%
Magna InternationalMG-T 304.9 $121.866.50%
Encana Corp.ECA-T 439.4 $116.936.30%
Royal Bank of CanadaRY-T 1,403.1 $104.38.00%
National Bank of CanadaNA-T 900.4 $95.811.90%
Toronto-Dominion BankTD-T 4,326.4 $89.82.10%
Hydro One Ltd.H-T 320.9 $83.435.10%
Brookfield Asset ManagementBAM-A-T 1,179.4 $79.27.20%
iShares S&P/TSX 60 ETFXIU-T 1,585.9 $74.95.00%
Fortis Inc.FTS-T 1,143.2 $62.85.80%
Westjet Airlines Ltd.WJA-T 161.9 $47.241.20%
Lululemon AthleticaLULU-Q 858.3 $40.85.00%

Source: S3 Partners

U.S. trades for interlisted stocks are included in calculations (after converting to C$)

The Big Six banks show up on the table, so the short-the-banks trade still appears to be in force. Short sellers don’t think the banks are going have a meltdown similar to what occurred for U.S. banks in 2008 but they do think there could be higher provisions for credit losses that hit earnings and stock prices.

Investors who hold the banks for their dividends shouldn’t be overly concerned. The big banks do not have a history of cutting dividends and no cuts are expected this time around.

Manulife Financial has been targeted by activist short seller Muddy Waters. It believes the insurer is liable for billions of dollars in payments if the holders of certain policies win the right to be paid above-market interest rates on their deposits. A court ruled in favour of Manulife earlier this year but an appeal has been launched.

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