Despite the recent plunge in stock markets, there wasn’t all that much turnover among the most shorted companies in Canada during the month to Oct. 18. Some notable exceptions were a large jump in the short position on Laurentian Bank of Canada, a sizable decrease in Quebecor Inc.’s short position, and a further drop in the number of marijuana companies on the table of the most costly shares to borrow.
The first table shows the 20 most-shorted Canadian companies, based on the percentage of shares loaned out. The lending of shares is a proxy for short positions since short sellers need to first borrow shares to sell them. IHS Markit provided the data.
Probably the most significant change is the leap in Laurentian Bank of Canada’s short position to 28.3 per cent of shares, putting it in the top spot. Being the only unionized bank in North America, Laurentian Bank faces the risk of labour strikes and problems such as delays in the upgrading of branches and internal systems. In fact, that is what is happening now as management and union officials are at an impasse in the negotiations to reach a new collective bargaining agreement.
The second table lists the 20 companies with the largest monthly increases in short interest. Companies with less that $500-million in annual sales are excluded to keep the table from being overwhelmed by a multitude of tiny businesses.
Most of the large increases occurred from small short positions, so those cases should not necessarily be viewed as an indication of overly negative sentiment. One increase from a fairly large short position was recorded by Element Fleet Management Corp., a financial company providing services in the field of vehicle-fleet leasing and management. There were some troubles earlier in 2018, and recently, when the company issued $300-million of additional shares and cut its dividend by 40 per cent. On the positive side, the company generates a lot of free cash flow, and some insider buying has occurred.
The third table shows the 20 companies with the largest monthly decreases in short interest. Companies with less than $500-million in annual sales are excluded to keep table entries from filling up with micro-sized companies.
Most of the large decreases occurred from small short positions, so the changes should not be viewed as overly bullish. There was one notable case of a decrease from a large short position: media firm Quebecor Inc. The percentage of its shares sold short fell by well over a third during the month, to stand at 13.1 per cent as of Oct. 18. But this too was not grounds for much concern.
Here’s why: Quebecor’s large short position has mainly reflected a hedging operation on its convertible bonds. However, a recent conversion by the company of the debt into shares removed the need to hedge for many of the bond holders, leading to the closing out of many short positions.
The fourth table is compiled from data provided by Interactive Brokers. It lists the 20 companies with the highest 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 how much borrowing costs are bid up rather than the number of shares borrowed.
There are five marijuana companies on the table this month. This is somewhat high but still fewer than in the spring and summer months when at one point, nearly half of the entries were from the sector. The downtrend may continue in months ahead, now that legalization has arrived and opened the door for institutional investors to buy marijuana stocks.
Since they are the major supplier of loanable shares in the market, institutional investors buying pot stocks will boost the supply of shares available for borrowing. This could take some pressure off borrowing rates in the sector.
It is also worth mentioning that the cost-to-borrow table covers only companies listed on domestic exchanges, so Canadian companies may not show up if they are listed solely on U.S. exchanges. An example is marijuana company Tilray Inc., headquartered in Nanaimo, B.C. but listed on the Nasdaq. If Tilray had been included on the table, it easily would have laid claim to the top spot in recent months. As of mid-October, the cost to borrow shares was over 100 per cent on an annualized basis.
Larry MacDonald is an economist, author and financial writer.