Short sales on the TSX: Bearish investors are betting against stocks in this ‘faddish’ sector

Short sales on the TSX: Bearish investors are betting against stocks in this ‘faddish’ sector

OTC Markets

Monitoring short-selling activity on stock markets can be informative.

If an investor sees that some of their stocks are targeted by short sellers, they may want make sure their reasons for holding them are still valid. Monitoring short sales may also yield research ideas for investors who do short selling.

Short sellers borrow shares from brokers and sell them on the stock market. They are hoping to make a profit by later buying the shares at a lower price and returning them to the lender. Other times, they may be seeking to arbitrage price discrepancies between stocks and convertible securities.

Let’s take a look at which Canadian companies have attracted substantial short interest during the month ending Jan. 9.

Table I shows the 20 Canadian companies with the highest percentage of shares on loan Jan. 9, 2018, as provided by IHS Markit. We don’t want the number of shares on loan since a large figure may not entail significant bearish sentiment if the company has a lot of outstanding shares to begin with. To avoid such misleading impressions, it’s better to use the percentage of shares on loan.

Top 20 companies with the highest percentage of shares on loan (as of Jan. 9)

Company Sector % of shares on loan % change over month
Badger Daylighting Ltd. BAD-T Capital Goods 24.3% -4%
Quebecor Inc. QBR.B-T Media 20.8% -31%
Boardwalk REIT BEI.UN-T Real Estate 18.5% 0%
DHX Media Ltd. DHX.B-T Media 15.7% -24%
Ritchie Bros. Auctioneers Inc. RBA-T Services 14.0% 7%
First Majestic Silver Corp. FR-T Materials 13.9% -6%
Klondex Mines Ltd. KDX-T Materials 12.9% -20%
Canadian Western Bank CWB-T Banks 12.4% -21%
Genworth MI Canada Inc. MIC-T Banks 11.8% 1%
Labrador Iron Ore Royalty Corp. LIF-T Materials 11.4% -9%
Kelt Exploration Ltd. KEL-T Energy 10.8% -9%
Crew Energy Inc. CR-T Energy 10.3% -8%
Home Capital Group Inc. HCG-T Banks 10.2% -11%
Sandstorm Gold Ltd. SSL-T Materials 9.9% -4%
Pretium Resources Inc. PVG-T Materials 9.6% -8%
Innergex Renewable Energy Inc. INE-T Utilities 9.1% 23%
Cineplex Inc. CGX-T Media 9.0% 4%
Baytex Energy Corp. BTE-T Energy 8.4% -26%
Precision Drilling Corp. PD-T Energy 8.3% 1%
Maxar Technologies Ltd. MAXR-T Capital Goods 8.3% 18%

Source: IHS Markit

Numerous companies on Table I are experiencing declines in the percentage of their loaned-out shares. With the world economy turning up, and most sectors of the Toronto Stock Exchange now in a strong uptrend, many short sellers are unwinding positions to cut losses.

In this environment, the companies with no declines in their percentage have likely attracted some high conviction short sellers. Leading the way in this group, with a 23 per cent jump in shares short, is Innergex Renewable Energy Inc., a renewable-power utility in the hydroelectric, wind and solar sectors.

Utility stocks rallied over much of 2017, pushing valuations up. But with interest rates now showing signs of a sustained upward move, the yields and high debt loads of renewable-power utilities may not be as appealing. Innergex Renewable Energy is also digesting a recent large acquisition.

Table II shows the 20 companies with the highest cost to borrow shares, using data from Interactive Brokers. The cost to borrow is a helpful metric when the number of shares available for lending is small as may occur, for example, when many shares are held in brokerage accounts that don’t allow lending.

Top 20 most expensive shares to borrow (as of Jan. 9)

Company Sector Cost to borrow (annual %)
Concordia International Corp. CXR-T Healthcare 109%
Horizons Marijuana Life Science ETF HMMJ-T Marijuana 45%
Polymet Mining Corp. POM Resources 38%
MCAN Mortgage Corp. MKP-T Mortgage 38%
Organigram Holdings Inc. OGI-T Marijuana 35%
Cannabis Wheaton Income Corp. CBW-T Marijuana 33%
Mogo Finance Technology Inc. MOGO-T Fintech 31%
Global Blockchain Technology Corp. BLOC-T Fintech 29%
Callidus Capital Corp. CBL-T Financing 28%
Invictus MD Strategies Corp. IMH-T Marijuana 28%
Balmoral Resources Ltd. BAR-T Resources 27%
Urthecast Corp UR-T Spacetech 27%
Exchange Income Corp. EIF-T Aerospace 26%
Aphria Inc. APH-T Marijuana 26%
Lithium X Energy Corp. LIX-T Resources 24%
Radient Technologies Inc. RTI-T Ecotech 23%
Imperial Metals Corp. III-T Resources 22%
Leonovus Inc. LTV Fintech 20%
Northern Dynasty Minerals Ltd. NDM-T Resources 19%
Wealth Minerals Ltd. WML-T Resources 19%

Source: Interactive Brokers

Last month, nearly half of the entries on Table II were from the marijuana sector. But this month their numbers are lower because some short sellers likely covered their bets when marijuana stocks soared during December and early January.

Stocks from another faddish sector, blockchain companies, have started to show up. These companies are focused on the underlying technology that facilitates bitcoin and other digital transactions. On Table II, they are Mogo Finance Technology Inc., Global Blockchain Technology Corp. and Leonovus Inc.

Concordia International Corp. has the highest cost to borrow by far. The pharmaceutical company was once a market darling when it was on a debt-financed acquisition binge of other pharmaceutical companies. Now it’s a penny stock looking to convince debt holders to convert their holdings into equity positions – leaving existing shareholders uncertain just how badly they will be diluted.

Table III shows the 20 companies with the largest percentage increases in short positions, based on data from S3 Partners LLC. While the number or dollar value of shares sold short (or on loan) is not that informative, changes over time in these aggregates can be useful in disclosing changes in bearish views.

For Canadian companies listed on Canadian and U.S. exchanges, short positions on both exchanges are included in the tallies (after conversion to Canadian currency). To keep small-fry companies from filling up the table, companies are not included if their short position increased by less than $5-million.

Top 20 percentage increases in short positions for the month ending Jan. 9

Company Sector 1 month increase % 1 month Increase $ Short Interest $
Parex Resources Inc. PXT-T Oil & Gas 421.0% $28,535,434 $35,313,104
Franco-Nevada Corp. FNV-T Mining 278.9% $1,878,654,461 $2,552,344,338
Aphria Inc. APH-T Marijuana 180.1% $55,970,990 $87,055,598
Northland Power Inc. NPI-T Utilities 163.8% $53,711,077 $86,500,404
Aimia Inc. AIM-T Advertising 146.3% $11,874,157 $19,991,331
Brookfield Property Management BPY.UN-T Real Estate 138.9% $9,328,410 $16,043,182
Canadian Natural Resources CNQ-T Oil & Gas 138.5% $691,765,632 $1,191,204,718
Kinder Morgan Canada KML-T Oil & Gas 121.4% $13,059,931 $23,816,191
Stars Group Inc. TSGI-T Casino 114.5% $205,872,311 $385,673,510
Canada Goose Holdings Inc. GOOS-T Apparel 112.6% $13,003,340 $24,551,768
Freehold Royalties FRU-T Oil & Gas 111.2% $27,459,539 $52,156,804
Husky Energy Inc. HSE-T Oil & Gas 107.9% $99,696,439 $192,093,100
Gibson Energy Inc. GEI-T Oil & Gas 102.1% $31,263,426 $61,896,870
Raging River Exploration RRX-T Oil & Gas 99.5% $29,503,160 $59,156,761
Klondex Mines Ltd. KDX-T Mining 92.8% $82,043,945 $170,413,475
Whitecap Resources Inc. WCP-T Oil & Gas 91.3% $46,515,944 $97,473,070
Canadian REIT REF.UN-T Real Estate 88.8% $12,002,057 $25,511,995
Corus Entertainment Inc. CJR-T Broadcasting 86.8% $22,026,527 $47,409,477
Endeavour Mining Corp. EDV-T Mining 59.3% $13,775,166 $37,015,324
Dream Global REIT DRG.UN-T Real Estate 56.6% $7,069,117 $19,563,712

Source: S3 Partners LLC

One thing that stands out in Table III is the fairly large number of oil-and-gas companies. Some analysts have said that the sector is undervalued given stock prices are trailing rising international oil prices but other analysts, such as GMP FirstEnergy analyst Martin King, have issued reports pointing out that transportation bottlenecks in Canada are holding down oil-and-gas prices paid to domestic producers.

Larry MacDonald is an economist, author and financial writer.

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