Academic studies continue to find that stocks targeted by short sellers tend to underperform.
As professor Lee Smales and co-authors note in a March paper published online by the Australian Economic Papers: “More recent research shows that short sellers are informed traders that make correct predictions to earn higher returns. As such, they are important contributors to market efficiency.”
Shareholders in companies with significant short positions or changes – see the following tables sourced from S3 Partners – are thus well advised to make sure their due diligence is solid.
A highlight from Table I is the huge jump of $2.1-billion in short interest for the Royal Bank of Canada (RY-T). This was a 77.1-per-cent increase from March. As of April 27, 2.7 per cent of RBC’s float was sold short, up sharply from 1.7% in March.
The Bank of Montreal (BMO-T) and Toronto-Dominion Bank (TD-T) also had large increases in their short positions: $823.3-million and $445.4-million, respectively.
One possible cause of the escalation in short sales may be jitters over recent bank troubles and failures in the United States.
On Table II, two entries had significant increases in their percentage of float short: iShares S&P/TSX Utilities ETF (from 16.8 per cent to 22.8 per cent) and CI Galaxy Bitcoin ETF (from 13.2 per cent to 18.2 per cent). Four new securities appeared on the table: Tucows Inc, Purpose Bitcoin ETF, Peyto Exploration & Development Corp. and Purpose Ether ETF.
Five of the listings on Table II had high costs to borrow their shares: Lion Electric Co. (26.4 per cent), Canopy Growth Corp. (26.1 per cent), Aurora Cannabis Inc. (10.7 per cent), Purpose Ether ETF (19.1 per cent ) and Briacell Therapeutics Corp. (32.4 per cent). High borrowing costs are another bearish sign, but if bearish sentiment becomes too extreme, short squeezes become more of a possibility.
Table III lists companies with the largest decreases in short positions. Of note, the short positions in the Bank of Nova Scotia and Canadian Imperial Bank of Commerce dropped by $220.0-million and by $112.4-million, respectively. Also, Shopify Inc.’s short position decreased by $144.6-million: are short sellers anticipating good news when the company reports its first quarter financial results on May 4?
Methodological notes:
1) Some short positions may reflect, in part or whole, hedging/arbitrage positions – so they are not entirely bearish bets; if bearish sentiment is extreme, it can sometimes trigger a short squeeze that sends the stock price higher.
2) Short positions in inter-listed stocks were summed across exchanges in Canadian dollars.
3) When an investor purchases stock that was sold by a short seller, it creates a synthetic long position; if these long positions are not included in the float count, the percentage-of-float-short metric can be overstated – however, most of the time, the magnitude is not significant.
4) The percentage of float short for ETFs is impacted by the mechanism for creating/redeeming units, which results in almost daily changes in the number of units issued. The percentage of float short for ETFs may thus be more volatile than for stocks.
Larry MacDonald also writes at Investing Journey.
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