The company tumbled 16 per cent in September and its bonds have also taken a hit.Denis Balibouse/Reuters
The number of Bombardier Inc. shares sold short over the six weeks to April 30 doubled from 37.7 million to 74.1 million, according to TSX Datalinx. As a result, Bombardier is the most shorted company on the Toronto Stock Exchange. What's behind this sudden escalation?
It could be chalked up to a bout of bad news, for a start. Among the items were: the arrest of a Bombardier employee on bribery charges in Sweden, a notice of intent to cancel a Bombardier light rail contract by Toronto-based Metrolinx, the announcement of an increase of nearly 50 per cent in compensation for Bombardier executives, and finally, a call by Boeing Co. for an anti-dumping probe into the sale of Bombardier jets to a U.S. airliner.
But there has also been good news. A judge subsequently blocked Metrolinx's attempt to cancel its contract with Bombardier, the intended hike in compensation of Bombardier executives has been rolled back, and talks have surfaced between Bombardier and Siemens AG to merge their train units.
The surge in short interest could also reflect the common practice of short sellers raising their bets ahead of an impending quarterly earnings release if they think some bad news is forthcoming (the first quarter report is due Thursday for Bombardier). For example, in the case of Bombardier, Don LePan, a former Bombardier shareholder who is looking to buy back at a lower price, wonders if the company may have to lower its goal of delivering 30 to 35 C Series jets in 2017. His speculation arises from the low number of planes delivered year to date (three according to Bombardier). When asked about this Wednesday, Brian Tucker, director of media relations for Commercial Aircraft at Bombardier, said "the company's policy is not to comment on rumours or speculation."
Of course, the shorts have not always been right. There can instead be some good news that lifts the stock price. For example, when financial results were issued for the first quarter of 2016, Bombardier announced its largest C Series order to date: the purchase by Delta Air Lines' of 125 planes.
Although 74 million shares sold short sounds substantial, it is a rather small 4.2 per cent of the number of Bombardier shares freely trading. Also, the cost to borrow Bombardier shares for short selling is just 2.3 per cent (as of May 9), according to iBorrowdesk.com. While the short position has increased, it is still far from levels that would suggest Bombardier is at risk of losing its status as a going concern.