“Short selling can be like a cat waiting outside a mouse hole – the level of patience is not for everybody,” writes Kathleen Staley in The Art of Short Selling.
How true that is these days with the Toronto Stock Exchange up 15 per cent over the past three months and now in the tenth year of an historic bull market?
Many short sellers have no doubt given up, but a hardy group still believe patience is a virtue and are hanging in.
Let’s check out some of their top hunting grounds with the help of the Globe and Mail’s monthly tables on short positions.
The first table lists the 20 Canadian companies with the highest percentage of shares on loan (short sellers need to borrow stocks in order to sell them short). Market-intelligence firm IHS Markit gathers the data from prime brokers, custodians and asset managers around the world.
A company that has not appeared much on the table is Parkland Fuel Corp., an operator of gas stations and refineries.
It is getting hit by the Alberta government’s decision to restrict production in the province’s energy sector. The curtailments boost prices for ailing oil-and-gas producers but companies with refining operations now have to pay higher prices for feedstocks.
Another newbie is Transcontinental Inc., a printing business transitioning to the printed-labels and packaging space. A big U.S. acquisition financed with $1-billion of debt and recent earnings misses have made some investors wary. Yet there is substantial insider buying and the stock is cheap given a price-to-book ratio of 0.5.
The second table shows the 20 largest increases in the dollar value of short positions over the past month. Many large companies will necessarily appear on this table but this can be useful for investors interested in bearish bets on large-cap stocks (they won’t see them much on the first table because their percentage of shares short tends to be small given their huge number of shares).
Large increases in the dollar value of short positions take on more significance for a company if it has made consecutive appearances on the monthly tables. Such was the case for Shopify Inc., Canadian National Railway Co. and First Quantum Minerals Ltd., which have all appeared on the last three tables.
Perhaps the most significant is Shopify.
It has emerged as a great Canadian growth story in the e-commerce space by making it easy for businesses of all sizes to establish a commercial online presence through a suite of tools for building websites. But Shopify remains unprofitable and has a sky-high valuation: the share price is more than 300 times the consensus earnings-per-share forecast by analysts on a 12-months basis. Meanwhile, Facebook and others are launching ventures that compete with Shopify
For the third table, which presents the 20 largest decreases in the dollar value of short positions, an interesting development is the decline in SNC-Lavalin’s short position. Perhaps it hints at a favourable resolution of the current bribery scandal. For example, laws could be changed to enable the engineering and construction company to bid on federal contracts in the event of a criminal conviction.
The fourth table shows companies with the most expensive shares to borrow. They tend to be small and have a relatively low number of freely trading shares, so short sellers often have to bid up borrowing costs to engage in short sales.
Marijuana companies have long showed up in numbers on this table but now they are scarcely noticeable. However, the bigger members of the industry, notably Canopy Growth Corp. and Aurora Cannabis Inc., are now showing up on the tables for largest increases in the dollar value of short positions and highest percentage of shares short. Bearish sentiment hasn’t necessarily diminished – it seems to have migrated to companies that are getting bigger and easier to short because more shares are available, and at lower lending rates.
Not all short sellers wait patiently by the mouse hole. Some actively pursue their opportunities by spreading bearish views through media interviews, research reports and social-media forums.
Currently, one of the more vocal groups, led by Steve Eisman of Neuberger Berman, is targeting the Canadian banks. According to data-analytics firm S3 Partners, dollar bets against the banks rose by 19 per cent over the first ten weeks of 2019.
However, Canadian banks have been under attack for more than a decade, to no avail. Maybe the current crop of short sellers will get it right but it’s beginning to sound like the boy who cried wolf too many times.