Pedestrians walk past the head offices of Laurentian Bank in Montreal, April 1, 2015.CHRISTINNE MUSCHI/Reuters
There was a fair amount of turnover among Canada’s 20 most shorted stocks in August. Some companies, such as AutoCanada Inc., First Majestic Silver Corp. and Laurentian Bank of Canada, saw jumps in short interest that catapulted them onto the top-20 list or considerably raised their ranking from the previous month. Other companies, such as Quebecor Inc. and Badger Daylighting Ltd. experienced major drops in short interest that took them off the list or further down the rankings.
Short sellers borrow shares and sell them, expecting prices to drop so a profit is realized when the shares are purchased and returned to the lender. Academic studies have found that shares targeted by short sellers underperform on average. Of course, there will be exceptions – and short squeezes (upward spikes in stock prices caused by short sellers rushing to buy and return shares to owners).
In August, a short squeeze may have contributed to the sharp run-up in Canopy Growth Corp.'s stock after the company announced a major injection of capital as U.S. alcohol giant Constellation Brands Inc. said it planned to buy 104.5 million new shares in Canopy for $48.60 each, a deal valued at about $5-billion. Preceding the rapid gain was a substantial decline in Canopy’s short position from July. Perhaps some of the more informed short sellers saw the news coming?
The first table, which lists the Canadian companies with the highest percentage of shares on loan shows the 20 most-shorted companies for August, based on the percentage of shares loaned out. The lending of shares serves as a proxy for short positions since short-sellers first have to borrow shares. The data provider is IHS Markit and the data is from Aug. 24.
Topping the list this month was AutoCanada Inc., a car retailer with more than 60 dealerships. Its stock price is down more than 75 per cent over the past four years and second-quarter results released on Aug. 10 were disappointing. Some analysts have worries about debt levels and management turnover.
First Majestic Silver Corp., a silver producer with projects in Mexico, also had a major jump in short interest, ending up with nearly 22 per cent of shares out on loan. According to the second-quarter report, the company remains a high-cost miner, with all-in costs at US$16.43 per ounce.
Laurentian Bank’s short position also shot upwards. The bank had problems with questionable mortgage originations a while ago and is not too diversified beyond Quebec. Also, there are concerns it lacks scale to build the technology platforms that bigger banks are building for an online world.
In August, Quebecor Inc. disappeared from the table of the 20 most shorted stocks, after being near the top for a long time. A buyback of the company’s convertible debentures was recently announced, so there is no longer a need to hedge the convertibles through a short position in the stock.
Short sellers retreated further from shares in Badger Daylighting Ltd., an excavator that uses water jets and vacuums to remove earth around sensitive structures. Bulls believe the upturn in the economy will boost infrastructure spending and support oil prices, benefiting much of Badger’s customer base.
Back in July, Maxar Technologies Ltd., a provider of satellite equipment and earth images, experienced a dramatic surge in short interest, to 21.1 per cent of shares loaned out. A few weeks afterward, short-selling firm Spruce Point Capital Management issued a strong sell recommendation. In August, the percentage of shares loaned out was unchanged.
The 20 Canadian companies with the highest cost to borrow shares are displayed in the second table. The cost to borrow is another way to gauge bearish sentiment. It is useful for when the number of shares available is small and short sellers reveal their sentiment more through the extent they bid up borrowing costs.
Normally, some of the entries in this table are commented on. But this month, we would like to instead discuss another matter worth noting – specifically that investors bullish on stocks with high costs to borrow would be better off buying them though a broker who shares the fees. The income can be significant: Our tables show interest rates in excess of 30 per cent are paid on selected stocks.
Not many brokers in Canada share the fees. A notable exception is Interactive Brokers Canada, which transfers half of the interest payments to investors via its Stock Yield Enhancement Program.
The program “covers U.S. stocks and Canadian stocks trading in the United States,” notes Bruce Turner, vice-president of securities lending services at Interactive Brokers. But “we plan to add stocks on major Canadian exchanges in coming months.” Until then, it may be advantageous in some cases to buy a hard-to-borrow Canadian stock through a U.S. market than through a Canadian listing.
Larry MacDonald is an economist, author and financial writer.