There were some notable developments in the short selling of Canadian stocks over the month to mid-September.
One highlight was Tucows Inc. appearing for the first time on the table of the 20 most shorted companies, seven months after a short-seller issued a highly negative report on the Internet domain registrar. Other highlights were: a wave of precious-metals companies racking up some the biggest monthly increases in short interest; marijuana producer Canopy Growth Corp. scoring one of the largest monthly decreases in short interest and FinTech firms becoming more numerous on the table of companies with the highest cost to borrow shares.
The first table shows the 20 most-shorted Canadian companies (as of Sept. 12), based on the percentage of their shares loaned out. The lending of shares serves as a proxy for short positions since short sellers first have to borrow shares to sell them. The data provider is IHS Markit.
The majority of companies on the table have made appearances in previous months. Many of them have been discussed in previous updates, so let’s focus here on one of the newcomers: Tucows Inc., headquartered in Toronto.
Tucows has one of the largest Internet-domain registration services in the world, a discount mobile-phone service and a fiber-optics Internet business. Rapid growth in these lines helped the company’s stock appreciate more than 1,000 per cent over the past five years. But selling pressure in 2018 has pushed the stock down about 20 per cent year-to-date.
Short-seller firm Copperfield Research halted the stock’s upward momentum in January with a critical research report. It accused management of delaying the disclosure of negative news so insiders could unload shares, permitting unsavoury groups, like Neo-Nazis and child pornographers, to register domains, and using accounting irregularities that overstated revenues and earnings.
The second table lists the 20 companies with the largest monthly increases in short interest. The biggest increase was recorded by Dublin-based IPL Plastics Inc., a provider of packaging products. Although the company has been around since 1939 and now has a global workforce of 1,900 employees, it was just listed for trading in Canada during June, with a 6-month lock-up period for some investors.
IPL Plastics traded on the Montreal Exchange from 1985 to its privatization in 2010, and is now backed by the Caisse de dépôt et placement du Québec and Fonds de solidarité through a one-third equity stake. But margins in the plastic packaging industry are currently under pressure due to higher resin prices. Regulatory changes in U.S. trucking have also pushed up transportation costs.
Other notable increases in short positions were registered by a number of precious metals companies. Two senior Canadian gold miners, Agnico Eagle Mines Ltd. and Barrick Gold Corp., placed near the top with jumps of 309.4 per cent and 140.9 per cent, respectively. Smaller precious-metals firms making appearances were: SEMAFO Inc.; Sandstorm Gold Ltd.; Osisko Mining Inc. and First Majestic Silver Corp.
Gold stocks may be losing some lustre because of the twelve-per-cent decline in the price of bullion over the past 6 months. The macroeconomic environment has become less supportive: a strong U.S. economy is pushing up interest rates, making gold less attractive (as it does not pay interest). The U.S. dollar is also getting a boost, which cuts into purchases of gold by non-U.S. investors.
The third table shows the 20 companies with the largest monthly decreases in short interest. Of note is the near halving in the percentage of Canopy Growth Corp.’s shares on loan. This plunge confirms that a short squeeze did occur in Canopy’s stock in response to the announcement last month that Constellation Brands Inc. was investing $5-billion in the Canadian marijuana firm.
The squeeze produced a rush to close short positions and this buying of Canopy shares caused the price to shoot higher. As a result, valuation levels have become stratospheric, presenting what may be one of the better opportunities to go short for any short sellers still on the sidelines.
The fourth table lists the 20 companies with the highest cost to borrow their shares. The cost to borrow is useful to consider when the number of loanable shares is small and short sellers reveal their sentiment more through the extent they bid up borrowing costs.
In recent months, just one or two companies bringing new technologies to the financial-services sector (FinTech firms) have shown up on the cost-to-borrow table. But in August and September, there were three: Galaxy Digital Holdings Ltd., Goldmoney Inc. and Mogo Finance Technology Inc. This could be a reflection of the recent downturn in investor enthusiasm for bitcoin, blockchain and other digital assets.
Galaxy Digital Holdings Ltd. is a merchant bank focused on digital assets and the blockchain industry. It is backed by former hedge-fund manager and billionaire Mike Novogratz.
Goldmoney Inc. offers online accounts that enable trading and spending of physically redeemable precious metals stored in vaults. A goal is to provide financial security outside of the banking system.
Mogo Finance Technology Inc. offers several financial products over the convenience of mobile phones. The products include: personal loans, identity-fraud protection, mortgages, and Visa Debit card.