Short selling can be a red flag. That’s because studies in peer-reviewed journals have found stocks with significant short interest tend to underperform. So, if any of your stocks are in the crosshairs of short sellers, it might be a good idea to doublecheck the bullish thesis.
Several firms provide short-sales data. One is S3 Partners. It has the advantage of calculating the short positions of Canadian companies listed on Canadian and U.S. exchanges as the sum of Canadian and U.S. short interest (after converting U.S. short interest to Canadian dollars).
Here are the Canadian companies with significant short interest as of Nov. 27, according S3 Partners.
One entry worth highlighting on the 20 most shorted companies by dollar value table is Shopify Inc. (SHOP-T), which had the fourth largest short position by dollar value ($3.7-billion). While a large short position by dollar value may simply reflect a large number of shares trading, what’s of note is the large 41 per cent increase during the past 30 days. Much of this increase was caused by the short positions being revalued upwards by a 34 per cent gain in the stock price over the month.
Independent research firm Veritas Investment Research upgraded Shopify to a buy-equivalent rating several weeks ago because the e-commerce company “has many levers to maintain revenue growth over the medium and long term ... and is also one of only two e-commerce platforms to have gained share amongst Enterprise retailers over the past two years.” But valuation remains a concern.
On the 20 most shorted companies by percentage of float table, Canada Goose Holdings Inc. (GOOS-T) is once again perched at the top, with 32.6 per cent of its float sold short. Brian McGough, a retail analyst at another independent research firm, Hedgeye Risk Management, has been bearish on Canada Goose in the past because of his belief Canada Goose was not demonstrating enough supply discipline in support of the brand pricing for its luxury outerwear.
Some sell-side analysts have also been concerned recently about the macroeconomic slowdown in China, where Canada Goose is seeking to generate growth. On the other hand, Veritas Investment Research maintained its “buy” recommendation on Canada Goose earlier this month because valuation had dropped to a significant discount to its long-term average.
One company on the 20 largest one-month increases in short positions table perhaps worth mentioning is Great-West Lifeco Inc. (GWO-T). What is notable about the $212.7-million increase in its short position over the past 30 days is that it was a proportionately large increase of 25.2 per cent. And it brought the portion of float short up to 8.9 per cent, which is on the high side for a large and established company. Nonetheless, its dividend yield is an attractive 4.8 per cent.
The large drop of $181.5-million in First Quantum Minerals Ltd.’s (FM-T) short position on the 20 largest one-month decreases in short positions table represents a 52.8-per-cent decline during the past month. This decline largely came about when the existing short position was revalued downward due to the company’s stock losing half of its value at the end of October. The stock plunged when Panama’s President Laurentino Cortizo announced a Dec. 17 referendum on First Quantum’s Cobre copper mine (in an attempt to placate mass protests in Panama against the contract that Cortizo’s government recently awarded to the Canadian miner).
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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