According to academic studies, stocks targeted by short sellers tend to underperform, but may see their prices periodically shoot upward in short squeezes. Monitoring short-selling activity can thus help with identifying torpedo and rocket stocks. To this end, the Globe and Mail presents the latest instalment of the Short sales on the TSX column, covering the month to mid-August.
Companies with the highest percentage of float sold short
Let’s begin with the percentage of float (freely trading shares) sold short, as highlighted in the table, Top 20 companies by percentage of float sold short. The data for the tables in this article are sourced from data-analytics firm, S3 Partners, unless otherwise noted.
Jumping onto the table for the first time and claiming the No. 1 spot with 47.3 per cent of its float sold short is BriaCell Therapeutics Corp., a Vancouver-based biotech company developing treatments for managing cancer. In second place with 32.3 per cent of its float short is another company appearing for the first time: Worksport Ltd., a Concord, Ont.-based manufacturer of tonneau covers that generate onboard solar power for pickup trucks.
The risk of a short squeeze is elevated if there has been a strong appreciation in stock price and short sellers are feeling pressure to buy back the shares they borrowed. Shorted companies on the table with strong price appreciation are Lithium Americas and Westshore Terminals.
Other factors contributing to squeezes are high stock-lending rates and days-to-cover ratios. Companies with readings over 30 for either measure were: BriaCell Therapeutics, Air Canada, Exco Technologies, Tucows and Westshore Terminals.
Insider trades (source: INK Research) can also assist with the interpretation of short positions. One of the shorted companies had heavy insider buying: Exco Technologies, a supplier of dies, molds, components and assemblies to the automotive industry. The $5.4-million in purchases by company directors over the past year provides a caveat to short sellers’ bearishness.
Insider selling is a weaker signal but it was quite substantial over the past year in cannabis stocks, particularly: Cronos Group ($43.1-million), Canopy Growth ($11.3-million) and Village Farms ($59.5-million). Outside the sector, there was significant insider selling in Air Canada ($2.5-million), Lithium Americas ($6.0-million) and Tucows ($2.7-million).
Companies with the largest increases in short positions
Large increases in short interest can be another bearish signal. The table, Top 20 companies with significant 1-month increases in short sales, presents the top 20 increases in the dollar value of short interest over the month ending Aug. 20.
Worth highlighting are the many chartered banks appearing on the table. Several other companies from the financial sector also show up, notably insurance companies and alternative asset manager Brookfield Asset Management. Outside of the finance sector, two companies not only had large monthly increase but also high percentages of float sold short: Lithium Americas and Aurinia Pharmaceutical.
Companies with high borrowing rates for their shares
Academic researchers say it is important to check the loan rates that short sellers would have to pay to borrow stocks, since they can provide signals as well. Hence the creation of the table Top 15 lending rates for Canadian-listed stocks, which lists the highest lending rates for all stocks trading on the TSX.
Many investors, however, are looking to trade stocks with larger market caps, so let’s screen the more than 220 companies in the S&P/TSX Composite Index and list the ten highest in the table 10 highest borrow rates for stocks in the S&P/TSX Composite Index. At the top sits Brookfield Business Partners L.P with a borrow rate of 12.6 per cent. It is headquartered in Bermuda and functions like a private equity firm that buys, restructures and sells businesses.
Brookfield Business Partners enjoys ready access to capital thanks to the growing trend among institutional and wealthy investors to diversifying with alternative assets, such as private equity. However, leverage for Brookfield Business Partners is quite high: as of June 30, total liabilities were US$42.3-billion compared to a market cap of US$3.9-billion.
Note: high short interest or loan rates may not always be a bearish bet on lower prices. They can also reflect hedging or arbitraging operations on convertible securities and other situations.
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