In this update on short selling of shares in public Canadian companies, we cover: 1) activity at the ETF and company levels, 2) stocks vulnerable to short squeezes, 3) some sell recommendations from a select group of retired investment professionals, and the 4) legal troubles of activist short seller, Andrew Left. The source for short sales data in the charts and tables was S3 Partners (more details in the end note).
1. Short selling of Canadian companies at the ETF and company levels
As proxied by the short position on the iShares S&P/TSX 60 ETF (XIU-T), bearish sentiment on the future direction of the Toronto Stock Exchange (TSX) has edged up in recent months. But it is still down considerably from a year ago.
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Meanwhile, the short position in the iShares Canadian Corporate Bond ETF (XCB-T) has more than doubled over the past 12 months, to 8.9 per cent of float. Most of the increase was in the first six months when the prospect of interest-rate declines was faint (bond prices move inversely to rates) and expectations of corporate defaults were high. But with the XCB short position hanging in, it appears some investors may think that business defaults could still arise as commercial debt is rolled into new maturities that are still at higher rates than the lows of past years.
The iShares S&P/TSX Energy ETF (XEG-T) and BMO S&P/TSX Equal Weight Banks ETF (ZEB-T) also had notable increases in short sales. They now stand at 7.7 per cent and 6.6 per cent of float, respectively.
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Let’s now turn to the company level. Air Canada (AC-T) tops the small caps with 26 per cent of float short. Analysts have mentioned challenges such as increasing competition from WestJet and Porter Airlines expanding their routes, and rising labour costs as the recent bout in inflation motivates the airliner’s unions to demand higher wages when their contracts come up for renewal during the 2024 to 2026 period.
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Next, mid-cap companies:
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Then, large caps:
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2. Stocks vulnerable to short squeezes
While sizable short positions may warn of underperformance in a stock, short sellers can unintentionally push the price of a stock higher in a rush to buy back the shares they borrowed. Such panic buying could be triggered by a rising stock price, 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 short squeezes, with 100 being the highest probability and 0 being the lowest.
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3. Stock recommendations from retired investment professionals
Herb Greenberg, the American financial journalist whose niche was warning readers about torpedo stocks, is now 72 years old and retired from journalism but keeping busy with launching innovative investment-advisory boutiques.
His current offering, WallStreetBeats.com, provides unconflicted stock recommendations from a handpicked team of retired investment professionals. They provide Buy ideas for the long side and also flag stocks to avoid. Included in the latter category were some Canadian companies.
One was growth-by-acquisition waste-management firm, GFL Environmental (GFL-T) — although news leaked out in early June that GFL was considering takeover bids for all, or part, of its operations. Another Canadian company with a red flag was sports apparel retailer, Lululemon Athletica (LULU-Q).
4. The legal troubles of activist short seller Andrew Left
Citron Capital’s Andrew Left, an activist short seller who has targeted U.S. and Canadian firms, was charged in July with fraud after a three year investigation by the U.S. Department of Justice (DOJ).
Observers have said the charges were not an indictment of activist short selling. They relate instead to Mr. Left’s practises, particularly poor disclosure and covering his short positions as soon as Citron’s sell recommendations cratered a stock.
This might look like a pump-and-dump operation to some. However, the First Amendment protects free speech in the United States, so the DOJ can’t nail Mr. Left for saying what he believes about a company.
It will need to prove he was issuing false viewpoints in order to manipulate stock prices. This is not too high a bar in classic pump-and-dump schemes, where the prices of thinly traded stocks are driven higher by fake news.
But Mr. Left’s statements were based on lengthy research. And his conclusions were mostly on the mark. For example, the Wall Street Journal reported in 2015 that his 111 short-sale calls from 2001 to 2014 were followed by average price declines of 42 per cent in the year afterward.
Perhaps his disclosure should have been better but it does not seem he was manipulating stock prices with falsehoods. As for quickly covering his positions (often in part), this likely had more to do with the risk of unlimited losses on price spikes and the possibility large investors could engineer a short squeeze.
End note
S3 Partners was selected as the data source for short sales because Canada has many companies interlisted on U.S. exchanges and S3 Partners sums short positions (currency-adjusted) across both countries (other data sources don’t do this). Also, short positions, regardless of data source, may not always be purely bearish bets because of trades made for hedging or arbitrage reasons.