With September comes autumn, the time of the year most at risk for stock-market corrections. We have not seen too many of these seasonal downturns in recent years, but the choppiness in trading this past week – as highlighted by an upward spike of more than 35 per cent in the CBOE Volatility Index (VIX) – suggests dark clouds could be gathering. However, short sellers might be seeing it differently, more like blue skies on the way.
On the Toronto Stock Exchange, luxury parka maker Canada Goose Holdings Inc. (GOOS-T) in September continued to be one of the most shorted companies, with 29.3 per cent of its float borrowed and sold (based on data from S3 Partners). In August, the company said it was lowering its forecast for sales because the post-pandemic buying spree in the U.S. was fading in the face of stubbornly high interest rates and inflation. Canada Goose’s revenues in China still had good momentum at the time, but in the weeks since, there have been signs of a slowdown in that country’s economy too.
Increases in short positions can signal rising bearish sentiment. This month, insurer Great-West Lifeco Inc. (GWO-T) rose to the top of the list of companies with the largest 30-day increase by dollar value. The $403.9-million jump was an escalation of 26.9 per cent over the past month, bringing the total size of the short position on Sept. 27 to $1.9-billion, or 17.3 per cent of float. This might appear to be quite bearish sentiment but it should be kept in mind that short selling sometimes may reflect hedging or arbitrage motives.
Decreases in short positions can signal a decline in bearishness. Two banks are at the top of the list of companies with the largest 30-day declines by dollar value. Royal Bank of Canada’s (RY-T) short position dropped by $425.4-million to just 1.3 per cent of float; Bank of Montreal’s (BMO-T) short position fell by $112.6-million to 2.9 per cent of float.
Another indicator of short seller sentiment is the cost to borrow shares. A stock with a high cost to borrow usually means that short sellers are eager to place bets but there aren’t enough loanable shares available.
Many companies on the list have had costs to borrow their shares well over 50 per cent for a year or more. If you own any of these stocks, some brokers will share the borrowing fees with you. Interactive Brokers shares half, which is still a pretty high return when applied, for example, to an interest rate of 88.6 per cent (the current cost of carry for Chesswood Group Ltd., CHW-T). Bear in mind the borrow rates are not fixed; they fluctuate daily and can trend lower. Plus, some of the companies may be going concerns.
In recent weeks, Toronto-based Veritas Investment Research has issued several sell or reduce recommendations on companies (Note: some of the advice may have since been revised). Veritas doesn’t underwrite IPOs, which gives its analysts more freedom to issue independent investment research.
Methodological notes:
1) Some short positions may reflect, in part or whole, hedging/arbitrage positions – so they are not entirely bearish bets; if bearish sentiment is extreme, it can sometimes 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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