In this report, we cover:
- Top short positions in Canadian companies
- Top increases in short positions
- Stocks most at risk for short squeezes
- Most shorted ETFs
- Should we vilify or praise short sellers?
- Methodology and sources
Top short positions in Canadian stocks
Short selling occurs when shares in a company are borrowed and sold on the expectation they can be bought back at a lower price and returned to the owner. Academic studies have found that there is a correlation, on average, between short positions and underperformance for a stock. Below is a table of the most shorted Canadian companies, as of March 5.
Many of the companies on the table have been discussed in previous columns. Here are some that have not yet been covered, or need an update.
Obsidian Energy Ltd. (OBE-T) is a Calgary-based intermediate oil-and-gas company operating in the Western Canada Sedimentary Basin, where indigenous relations and the environmental impact of drilling have been concerns. Yet, there has been an improvement in the company’s balance sheet, insider buying by executives and a 50-per-cent gain in the stock over the year.
Andean Precious Metals Corp. (APM-X), has precious-metals operations in the U.S. and Bolivia. The stock price has run up more than 500 per cent over the past year or so, even though the short position was high for much of the time (but often at the highest level of risk for a short squeeze, according to S3 Partners’ indicator). In December, legendary investor, Eric Sprott, sold a sizable portion of his 10-per-cent investment stake acquired in 2024.
NexGen Energy Ltd (NXE-T) is in the sights of activist short seller Culper Research, which published a report on Feb. 6 claiming that the uranium exploration company had overstated the net-present value of a deposit. A check of the press releases on NexGen Energy’s website shows that it chose not to respond to the short seller. Since the short-seller report appeared, NexGen’s stock price is up more than 10 per cent.
Top increases in short positions
Changes in short positions can also be informative. A large increase often indicates that bearish sentiment is rising and there is a greater risk of a stock underperforming. The table below shows the companies with sizable hikes in short positions over the past month.
Barrick Mining Corp. (ABX-T) is positioned to benefit from the ongoing escalation in gold and silver prices but the company recently disclosed that its production levels will be lower and costs will be higher. There are also disputes, one with a partner over a joint project, and another with the government of Mali over a property in that country. Short selling could also be linked to the company’s plan to spin off its North American gold assets.
Thomson Reuters Corp. (TRI-T) has been hit by the sell-off in software stocks triggered by AI announcements. Goeasy Ltd. (GSY-T) provides loans to nonprime consumers.
Stocks most at risk for short squeezes
When some event or news item causes short sellers to close their positions in a rush, the result can be a spike in the stock price as they hurry to buy and return the borrowed stock. Data firm S3 Partners has created an algorithm, the Short Squeeze Score, to rank companies by the likelihood of a short squeeze, with 100 being the highest level and 0 being the lowest.
Largest short positions in ETFs
Short positions in exchange-traded funds (ETFs) can provide a picture of bearish sentiment at the sector or stock market level. As in previous months, energy EFTs continue to have the highest percentage of float short. However, the Betapro NYMEX Natural Gas Bear Plus ETF is a bet on natural gas prices falling, so shorting it is actually a bullish bet on natural gas prices.
Should we vilify or praise short sellers?
Short sellers are often vilified in social-media channels, such as Reddit.com. Yet dozens of empirical studies published by finance professors and other researchers in peer-reviewed journals argue that short sellers improve the efficiency and integrity of stock markets.
When a short seller exposes a company that is “cooking the books” or engaged in some other impropriety, that abuse is removed. The more extensive impact, however, is the deterrence effect: the prospect of becoming a short-seller target generates incentives for companies, auditors and other market participants to play be the rules.
A very readable and comprehensive review of the growing literature on the various aspects of short selling was published recently under the title “Short-Selling as a Market Discipline Mechanism: A Survey of Academic Literature” It identifies the various ways in which short sellers improve the functioning of stock markets. Here is a partial list:
For companies, this includes:
- curtailing aggressive accounting, fraud and earnings manipulation
- motivating better internal controls and lower costs in companies
- realigning executive compensation toward performance (e.g. more stock options)
- more independent and transparent boards of directors
- higher turnover of CEOs who are ineffective or resorting to manipulation/fraud
For auditors, this includes:
- companies paying for auditors to work more hours
- auditors doing higher quality audits (e.g. fewer soft audits in exchange for side jobs etc.)
For regulators, this includes:
- more discovery/investigations of market manipulations such as “pump and dump” schemes
- more discovery/investigations of company fraud and misrepresentations
For financial analysts, this includes
- providing a counterbalance to the proclivity for bullish calls
- generating new information that analysts can use to improve their forecasts
- minimizing conflicts of interest (e.g. less winning of underwriting deals via bullish calls)
Methodology and sources
S3 Partners was the main source for short-sales data. It was selected because Canada has many companies interlisted in the U.S., and S3 Partners can provide 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. The percentage of a company’s float (freely traded shares) is used instead of the percentage of outstanding shares to provide a better gauge of bearish sentiment.
As S3 Partners argues, the percentage-of-float-sold-short indicator significantly overestimates bearish sentiment for very heavily shorted stocks and should be corrected by adding to the float the synthetic long positions created by short sales (when a stock is shorted, it creates two owners of the same shares — the original owner and the buyer of the borrowed stock sold by the short seller — what is called a synthetic long position). This adjusted version of the percentage-of-float-sold-short indicator should be additionally calculated for a stock with extreme levels of short selling.
Note that short positions, regardless of data source or indicator, may not be purely bearish bets because of trades made for hedging or arbitrage reasons.
Larry MacDonald is author of The Shopify Story and blogs at Shopify’s Journey