A stock with a large number of short sales is not necessarily a reason to avoid it – but certainly a reason to make sure your due diligence is solid when considering an investment. Let’s highlight some of the short-selling activity on the Toronto Stock Exchange (TSX) during the month ending August 24, based on data provided by S3 Partners.
Short sales at the market level
Short sellers were slightly less bearish on the direction of the TSX in August, as proxied by the short position in the iShares S&P/TSX 60 ETF (XIU-T). On Aug. 24, it stood at $2.3-billion, versus $2.5-billion in July. There was a 5.4-per-cent appreciation in XIU over the month, so short sellers closed some positions to cut losses or take profits.
Special study: trend in Shopify’s short position
Shares in Shopify Inc. (SHOP-T) are down more than 75 per cent since their peak in November. Many investors are wondering how much further the downtrend will go. Short-selling activity suggests the bottom is getting close. There is a lot of volatility in Shopify’s short position but the general trend over the past year is down; short sellers are not maintaining or increasing the dollar value of their bearish bet as Shopify’s price trends down.
Trend in Shopify’s short sales on U.S. and Canadian exchanges over past year (US$)The Globe and Mail
Short sales at the company level – percentage of float sold short
For about a year now, Air Canada (AC-T) has been at the top of the list of stocks with the highest percentage of float sold short. This month’s reading of 34.0 per cent was down from 38.2 per cent in July and 36.8 per cent in June.
Sometimes short positions may not be a solely directional bet. They can also reflect hedging and arbitrage operations involving convertible securities in the company’s capital structure. Air Canada has issued convertible debentures and may be such a case, at least in part.
Stocks with large short positions are vulnerable to short squeezes (the price of a stock price shoots upward when short sellers rush to buy back the shares that they borrowed to sell short). One trigger is a high cost to borrow. Three stocks on the top-20 list had rather high borrowing costs: Lion Electric Co. (17.5 per cent), Briacell Therapeutics Corp. (23.7 per cent) and Hive Blockchain Technologies Ltd. (22.9 per cent).
Heavily shorted stocks are also susceptible to a short squeeze when they have low daily trading volumes relative to the number of short sales. Three companies had high days-to-cover ratios: Air Canada (62 days), Dream Office REIT (465 days) and Great West Lifeco Inc. (149 days).
Four companies are new to the list. They are: Hive Blockchain Technologies Ltd. (14.6 per cent), SNDL Inc. (14.1 per cent), iShares S&P/TSX Capped Energy ETF (13.3 per cent) and Aurinia Pharmaceuticals Inc. (12.12 per cent).
Vancouver-based Hive Blockchain Technologies Ltd. operates in the cryptocurrency mining sector, which is taking its lumps these days. For the quarter to June 30, the company had revenue of US$44.2-million and a net loss of US$95.3-million, compared to US$39-million revenue and net income of US$23.5-million in the same quarter the year before.
Calgary-based cannabis operator SNDL Inc. (previously known as Sundial Growers) recently acquired rival cannabis producer The Valens Company Inc. SNGL was a meme stock that issued a billion shares into the frenzy stirred up by Reddit’s WallStreetBets forum in 2021; its balance sheet has $314 million in net cash and is one of the strongest in the sector.
The iShares S&P/TSX Capped Energy ETF tracks a basket of oil and gas stocks. With XEG still up 97 per cent over the year as the global economy turns recessionary due to tight monetary policy, short sellers could be betting that the recent dip in XEG has further downside.
Victoria-based Aurinia Pharmaceuticals Inc is “developing voclosporin, an investigational drug, for the treatment of lupus nephritis, focal segmental glomerulosclerosis, and Dry Eye Syndrome.” According to INK Research, there was net insider selling of US$15.9-million on the Nasdaq over the past year (mostly in the first half).
Bearish views on companies
Most brokerages do not issue many sell recommendations because they don’t want to tick off companies that are, or could be, customers of their underwriting departments. The result can be an overly bullish bias to stock markets. That is one reason why calls to ban or restrict short selling are ill advised: short sellers offer a counterbalance.
One investment firm not hesitant to issue bearish views is Veritas Investment Research. It only does research; the firm delves into the nitty gritty of financial statements and accounting methods much like short sellers do. Earlier this month, they issued bearish reports on the following companies in recent weeks (some views may have since changed).
Larry MacDonald also writes at Investing Journey.
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