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Activist short-sellers go public with their bearish views on companies trading on stock exchanges. Sometimes they get it wrong, but they often get it right, too – enough times to take note of what they are saying. If you own a stock they are targeting, you may want to double-check your bullish thesis.

The first accompanying table lists short-sellers betting against Canadian stocks within the past year or so. There isn’t enough space to look at each position, so the focus here will be on some of the more interesting cases.

Short sellers and their Canadian targets in 2019

Short sellerCompany
Citron ResearchShopify, Cronos Group, Tilray, Aurora Cannabis
PAA ResearchCanadian banks, Canadian Tire
Neuberger BermanCanadian banks
Spruce Point CapitalDollarama, Maxar Technologies, Ballard Power
Muddy WatersManulife Financial, Asanko Gold
Viceroy ResearchPretium Resources
Hindenburg ResearchAphria, Liberty Health
Curvature Hedge StrategiesCanada Goose, Aurora Cannabis, Open Text
EdgeHill PartnersBlackBerry

Source: Larry MacDonald, short seller websites

Note: The last two entries have publicly disclosed their short positions in interviews on BNN Bloomberg not as part of an activist campaign; their short positions are often part of a pairs trade.

Canadian banks

It would seem fair to say that the sector in which activist-short sellers have been most vocal this year is the Canadian banks. Leading the charge is Steve Eisman, portfolio manager at Neuberger Berman LLC. His message is that the credit cycle is in its late stages. A slowdown in economies and housing markets will likely trigger higher loan delinquencies.

On top of this, some analysts believe Canadian banks are underprovisioned for credit losses. A big reason for this, according to PAA Research CEO Bradley Safalow, is the optimistic growth assumptions used in the credit-loss models required under the IFRS-9 accounting rule. They have kept allowances for capital impairments on the low side (and earnings on the high side).

Yet, recent data for the Big Six banks indicate that a pullback from bearish bets has occurred. According to financial analytics firm S3 Partners LLC (second accompanying table), the increase in their short positions over the first four months of the year was 5.8 per cent. This is noticeably smaller than the 13-per-cent jump recorded during the first three months of the year.

BankShort interest on Jan. 1, 2019 ($mil.) Short interest on May. 1, 2019 ($mil.)Dollar change year-to-date ($mil.)Percentage change year-to-date
TD Bank$2,622 $3,292 $670 25.5%
Bank of Nova Scotia$2,221 $2,256 $35 1.6%
CIBC$1,882 $2,074 $193 10.2%
Royal Bank$1,126 $566 ($560)-49.7%
Bank of Montreal$1,006 $1,149 $143 14.3%
National Bank$540 $608 $68 12.5%
Total$9,398 $9,947 $549 5.8%

Source: S3 Partners LLC. Note: Trades on U.S. exchanges have been included after converting to C$.

Short-sellers may be easing up because bank stocks have surged in 2019 and inflicted losses on their positions. Consider an exchange-traded fund covering the sector: the BMO S&P/TSX Equal Weight Banks ETF. It is up 14.2 per cent on a year-to-date basis.

However, some of the smaller banks and the intermediaries lending to less creditworthy borrowers are attracting substantial short interest, S3 Partners’ data reveal. Several have high readings for the percentage of their float sold short, particularly Genworth MI Canada Inc. (20.1 per cent), Home Capital Group (19.8 per cent), Equitable Group (18.3 per cent) and Laurentian Bank (16.3 per cent).

Shopify Inc.

The head of Citron Research, Andrew Left, released in early April another bearish report in his continuing campaign against Shopify Inc., the Ottawa-based e-commerce firm whose suite of cloud-based tools is simplifying online store sales. The overlooked report drew attention to rising competition from Instagram and elsewhere – not a good development for Shopify with its priced-for-perfection valuation.

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Nonetheless, Shopify came out on top when it released first-quarter results at the end of April – again blowing away analysts’ estimates with revenues rocketing 50 per cent. A lot of it was because of the multilingual e-commercial platforms developed to spur international expansion. Since Mr. Left’s report, Shopify’s shares have climbed another 30 per cent – and more than doubling in price since Christmas.

Canadian Tire Corp. Ltd.

Mr. Safalow of PAA Research has been updating his views in his Twitter account since his most recent research report appeared in late 2018. Concerns include competition from low-cost retailers, the quality of the credit-card book and delays in e-commerce initiatives.

Canada Goose Inc.

The high valuation of Canada Goose’s stock is one reason why James Hodgins, chief investment officer at Curvature Hedge Strategies, is bearish. Its growth in quarters ahead was expected to be boosted by sales in China, but with Canada-China relations on the wane, there may be some negative surprises in store for the maker of high-end winter coats.

Cannabis stocks

Short-sellers have cannabis stocks in their sights because valuations have outrun earnings and revenues. Reinforcing the bearish thesis is an April 10 report by Kristine Owram of Bloomberg. It suggests Canadian producers could lose their first-mover status as the United States takes steps to legalize cannabis at the federal level within the next two years.

Of the U.S. cannabis suppliers operating in the fewer than 15 states that have legalized cannabis so far, six have already become large enough to claim spots on the list of top-10 producers. In addition, the current premium in Canadian wholesale prices is likely to be eroded by growing supply, and Canada’s cold climate gives it a competitive disadvantage in growing cannabis.

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