Before proceeding to our regular monthly update, lets review some highlights in short selling from 2023, as compiled by data firms S3 Partners, Breakout Point and iBorrowDesk.
The short position in the iShares S&P/TSX 60 ETF (XIU-T) went into a downtrend as the year wound down, ending at 12.3 per cent of float in January of 2024. This was a decline of nearly half from 12 months before, according to S3Partners. A common interpretation of such a trend is that market participants felt less need to hedge against a decline in the Toronto Stock Exchange.
Meanwhile, there was a rather distinctive uptrend in short sales for the iShares Canadian Corporate Bond ETF (XCB-T). During 2023, it rose steadily to 9 per cent of float.
Also, the trend in the short position for the iShares S&P/TSX Capped Utilities ETF (XUT-T) had extreme fluctuations in the percentage of float sold short. What could account for much of the volatility is the tiny size of XUT’s short position and float, which magnifies fluctuations.
One of the more interesting highlights from 2023 (and the two previous years as well) is the track record of activist short sellers, as compiled by Breakout Point. Activist short sellers — the folks who issue unvarnished sell reports on the companies they are shorting — have been very successful in Canada.
The average decline in the five stocks targeted in 2023 was -21.4 per cent, according to Breakout Point. This compares favourably to the average decline of -3.8 per cent for the 129 stocks targeted globally by activist short sellers in 2023.
Over the three years from 2021 to 2023, nearly every bearish bet paid off for activist short sellers in Canada. With only one of their 25 campaigns going against them, their success rate stands at 96 per cent. The one exception was Brookfield Infrastructure Partners LP, recently targeted on Oct. 23, 2023.
The year 2024 already has its first activist short sale. On Jan. 18, J Capital Research published a sell report on Hut 8 Corp., a bitcoin miner.
Monthly Update for TSX short sales
In January, the most shorted company by percent of float remains, yet again, Canada Goose Holdings Inc. (31.2 per cent). They have quite a streak going at the top of the 20 most shorted companies, as noted and discussed in many previous Short sales on the TSX updates.
New faces in the top 20 include: Hive Digital Technologies Ltd. (16.0 per cent) and Bitfarms Ltd of Canada (14.6 per cent). Along with the activist short on Hut 8 Corp., it appears that crypto is having a “buy the rumor, sell the news” moment in the wake of U.S. regulators recently approving several bitcoin ETFs.
Another new face in the top 20 is the iShares U.S. IG Corporate Bond (Cad) ETF (16.6 per cent). Its short position is relatively small in dollar terms at $30 million but to get there it rocketed upward over the month by more than 2,000 per cent from a low base. Along with the uptrend in bearish bets of the iShares Canadian Corporate Bond ETF, short-selling data appears to be hinting that corporate bond prices are headed for a decline.
Companies on the 20 Most Expensive Stocks to Borrow table are difficult to sell short because of low trading volumes and insufficient supply of loanable shares. Bearish sentiment thus tends to show up in the cost to borrow their shares instead of the percentage of float short.
A few brokerage firms will share the lending fees with investors holding shares in such companies. Some stock have been expensive to borrow for years, so the income stream for a long investor could be substantial, although many of these microcap companies come with a higher risk of insolvency.
Appendix: Methodological notes
1) Some short positions may reflect, in part or whole, hedging/arbitrage positions – so they may not be entirely bearish bets. This is particularly the case with the iShares S&P/ TSX 60 ETF, which many institutional and professional investors use to hedge out market risk from their portfolios. Note that if short selling becomes extreme, especially for individual stocks, it may 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.
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