In this update on short sales of Canadian public companies, we report on:
- Companies and ETFs targeted by short sellers
- Stocks most susceptible to short squeezes
- Stocks targeted by the Accelerate Canadian Long-Short Equity Fund
- The priest fighting a ban blocking his hedge fund from short selling
- End note on data sources
1. Companies and ETFs targeted by short sellers
At the company level, Air Canada (AC-T) again tops the list for small caps, with more than 31 per cent of its float sold short. A strike by the pilot’s union has been averted but Air Canada has several other unions whose contracts need to be negotiated.
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The CI First Asset Enhanced Short Duration Bond ETF (FSB-T) has an unusually high percentage of float short of 206.6 per cent. The percentage shot up during September when the number of shares sold short rose quickly from zero to 38 million.
However, this percentage fails to account for the long positions created when investors buy the borrowed shares sold by short sellers. When short selling is heavy, as data analytics firm S3 Partner argues, such long positions should be added to the float. On this basis, the percentage comes in at 67.4 per cent.
Perhaps the short selling is an arbitrage between the price of the ETF units and underlying assets? The ETF invests in debt instruments across the credit spectrum and uses government bond futures to lower the duration of the fund to provide better returns than other short-term fixed-income strategies.
2) Stocks most susceptible to short squeezes
While short positions often warn of underperformance in a stock, short sellers can unintentionally push stock prices higher if they rush to buy back the shares they borrowed.
Such panic buying could be triggered by mounting losses, higher borrowing costs, dwindling trading volumes and other factors. S3 Partners combines these factors into an algorithm, called the Short Squeeze Score, to rank companies by the likelihood of a short squeeze — with 100 being the highest probability and 0 being the lowest.
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3) Stocks targeted by the Accelerate Canadian Long-Short Equity Fund
Accelerate Financial Technologies Inc. has developed a multi-factor model to rank stocks based on factors such as value, quality and operating momentum. The model is used to buy and short sell stocks for the Accelerate Canadian Long-Short Equity Fund (ATSX-T), an ETF that functions like a hedge fund.
The fund has earned 9.0 per cent on an annualized basis since inception in May of 2019. About three-dozen companies are sold short in the fund. A sample of the bearish bets are shown in Table 6.
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4) The priest whose short selling got his hedge fund banned
Father Emmanuel Lemelson is a Greek Orthodox priest who founded a hedge fund (I kid you not). In 2014, he made over $1-million by short selling the stock of a pharmaceutical company after disseminating his views that the executives were engaged in a massive accounting fraud.
It seemed the priest was on the right track because the pharma company was later sued for several billion dollars by its investors, including hedge fund Citadel LCC. But the Securities Exchange Commission (SEC) still found Father Lemelson guilty of issuing false statements and banned him from the market.
A few weeks ago, Father Lemelson filed a complaint in a U.S. court seeking relief from the trading ban. His argument is that the way the SEC decides cases in-house is unconstitutional and violates the right to a trial by jury.
Not only are the rulings of the SEC reached without juries but the administrative law judges who issue the rulings are appointed by the SEC and determine the scope of permissible evidence. They may also admit hearsay and other testimony inadmissible in federal court.
There have recently been successful challenges of the SEC’s administrative proceedings, as highlighted by the U.S. Supreme Court’s decision on June 27, 2024, in SEC vs. Jarkesy. Father Lemelson’s challenge is likely to win as well, given the Jarkesy precedent.
This should give more impetus for SEC to bring trials to federal court. Given a study found that the SEC had won 90 per cent of its in-house proceedings versus 69 per cent in federal court, companies pressuring U.S. regulators to punish short sellers now seem to have lower odds of succeeding.
5. End note on data sources
Unless otherwise mentioned, S3 Partners was the source for short-sales data. It was selected because Canada has many companies interlisted on exchanges in the United States, and S3 Partners sums short positions (currency-adjusted) across both countries. Other data sources for short sales data don’t do this. Also note that short positions, regardless of data source, may not be purely bearish bets because of trades made for hedging/arbitrage reasons.
Larry MacDonald is a regular contributor to the Globe & Mail and author of a new book, The Shopify Story: How a Startup Rocketed to E-commerce Giant.