In this update on the short selling of shares in Canadian public companies, we report on:
- Companies with the largest short positions
- ETFs with the largest short positions
- Stocks susceptible to short squeezes
- Sell/reduce recommendations from independent analysts
- Dismissal of a regulatory action against a short seller
- End notes on data sources.
Companies with the largest short positions
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ETFs with the largest short positions
Short interest in ETFs can provide an indication of bearish sentiment at sector levels.
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Stocks susceptible to short squeezes
While short positions tend to warn of underperformance in a stock, short sellers can unintentionally push stock prices higher if they rush to buy back the shares they borrowed. Such panic buying can be triggered by mounting losses, higher borrowing costs and other factors.
These factors have been combined by data firm S3 Partners into an algorithm, called the Short Squeeze Score, to rank companies by the likelihood of a short squeeze — with 100 being the highest probability and 0 being the lowest.
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Sell/reduce recommendations from independent analysts
Only 6 per cent of stock ratings issued by U.S. brokerage analysts in recent years were sell recommendations, according to FactSet. As academics claim, the small number of sell recommendations are linked to the need for research departments to support their firm’s underwriting division in its efforts to earn commissions from floating new shares for companies.
However, there are some investment firms that earn income solely from investment advice. One case is Toronto-based Veritas Investment Research, which reported last year that 40 per cent of its ratings were sell or reduce recommendations. Here are their most recent sell/reduce rankings (some views may have since changed):
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Dismissal of a regulatory action against a short seller
This month, a tribunal dismissed one of few regulatory actions in years targeting the practice of short selling in Canada. The Ontario Securities Commission had accused Cormark Securities of facilitating an “abusive short selling scheme” but it was found to have overreached regarding Cormark’s use of an industry practise in existence for decades.
This was the practise of facilitating the issuance of company shares through an arbitrage operation. An article by Globe and Mail columnists Mark Rendell and Tim Kiladze provided a good explanation in the case of cannabis companies issuing shares after the legalization of recreational use in Canada.
Basically, when cannabis companies floated new shares to the public, the broker underwriting the issue sometimes gave hedge funds a price discount on their bulk purchases to make sure the issue was taken up. But before buying the shares, the hedge funds would short the company’s shares at the market price and then cover the short sales with the discounted new shares bought from the company. This netted the funds a risk-free gain equal to the discount on each share.
End notes on data sources
S3 Partners was the main source for short-sales data. It was selected because Canada has many companies interlisted on exchanges in the United States, and S3 Partners sums short positions (currency-adjusted) across both countries. Other data sources for short sales data don’t do this. A cutoff was applied to exclude companies whose short positions were miniscule in dollar value. Also note that short positions, regardless of data source, may not be purely bearish bets because of trades made for hedging or arbitrage reasons.
Larry MacDonald is a regular contributor to the Globe and Mail, and author of several business books, the latest being The Shopify Story, published in October of 2024