In July, short sellers continued to retreat from a relentless bull market, led by substantially lower short positions in the shares of First Majestic Silver Corp., Badger Daylighting Ltd. and Canopy Growth Corp. Partially offsetting this move to the sidelines was a ratcheting up of bearish bets on several other companies, notably Baytex Energy Corp., Maxar Technologies Ltd., Alaris Royalty Corp. and Sleep Country Canada Inc.
Short sellers borrow shares and sell them on the hope the price will go down so they can reap a profit when the shares are bought back and returned to owner. Academic studies have found that shares targeted by short sellers tend to underperform, on average.
The first chart below displays the average percentage of shares loaned out for S&P/TSX 60 companies, as of July 10. This measure slipped to 1.84 per cent, reinforcing the downward trend in place since the high of 4.5 per cent recorded two years ago. It’s not that easy for a short seller to ply their trade in one of the longest running bull markets ever.
The lending of shares serves as a proxy for short positions since short-sellers have to first borrow shares. These data, and those in the first three tables below, are supplied by IHS Markit from their daily surveys of brokers in the securities-lending market.
The first table shows the top 20 Canadian companies in terms of percentage of their shares loaned out. The biggest increase (95 per cent) over the month to July 10 was recorded by Baytex Energy Corp., an oil-and-gas company based in Calgary. The company is digesting an acquisition and carrying a lot of debt, equal to 75 per cent of equity.
Next highest is Maxar Technologies Ltd., with a 56-per-cent jump in the percentage of its shares on loan. Maxar is the recent amalgamation of two companies, one a provider of satellite equipment and the other a provider of satellite imagery. Net debt is sizable, at four times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
Another notable jump (33 per cent) was Alaris Royalty Corp. The company provides capital to private firms in exchange for royalties; its dividend yielding more than 9 per cent may be at risk given the high portion of income needed to finance it.
Sleep Country Canada Holdings Inc. had a rather significant hike (31 per cent) in the percentage of its shares loaned out. The mattress retailer faces increased competition from e-commerce companies such as Casper.com.
There were companies with large jumps in the percentage of their shares short, as highlighted by the second table. But for the most part, they occurred from low levels of short selling activity.
The third table identifies companies with the steepest drops in short selling. Those of note include: Mexico-based silver producer First Majestic Silver Corp., capital goods firm Badger Daylighting Ltd. and marijuana supplier Canopy Growth Corp.
The fourth table lists the 20 Canadian companies with the highest cost to borrow shares. The cost to borrow is another way to gauge bearish sentiment. It is particularly useful when the number of shares available for borrowing is small and short sellers reveal their sentiment less through the number of shares they sell than by how high they bid up borrowing costs.
Concordia International Corp., a going concern attempting to transition to a new business model, tops the table once again, with an annualized cost to borrow above 100 per cent for the third month in a row. Mortgage lender Street Capital Group Inc. also remains near the top of the table as worries linger that Canadian house prices have risen to unsustainable levels.
One caveat worth mentioning is that using shares loaned out as a proxy for short sales may not always be entirely accurate when there is naked short selling (shares sold without first borrowing them). But this is frowned upon by regulators, so the extent shouldn’t be too large.
Another caveat is that a short position does not always signal a directional bet of the future course of a stock’s price. In some cases it may reflect an arbitrage operation aimed at scooping up profits from discrepancies that arise between the price of a stock and the price of a security convertible into the stock.