In this update, we cover:
- Collecting interest payments of 15 per cent to 165 per cent from short sellers
- Top short positions in Canadian companies
- Top increases in short positions
- Stocks most at risk for short squeezes
- Most shorted ETFs
- Methodology and sources
Collecting interest payments of 15 per cent to 165 per cent from short sellers
It sometimes costs a lot for short sellers to borrow a stock and sell it short. Investors in those stocks can earn some very high interest rates in the stock-lending accounts that brokers have recently set up to share the interest income with customers.
The table below, The 20 stocks with the highest lending rates on the TSX (March 26), shows the 20 highest interest rates bid on March 26 for shares in Canadian companies (with no restrictions on the size of their short positions).
If a shareholder loaned his shares at the bid in the broker’s stock-lending account, they would usually receive half of the rate, thus earning income ranging from 165 per cent for Borealis Foods Inc. (BRLS-Q) to 15 per cent for Nickel 28 Capital Corp. (NKL-T).
The rates fluctuate daily and can trend up or down, but for many companies, the payments remain elevated for extended periods. Borealis Foods, for example, has paid a rate mostly above its current level for six months, so investors lending their shares over that period received income amounting to at least 82.5 per cent of their principle.
Some companies have insolvency risk. But others have adequate to good fundamentals at bargain valuations. Consider Morguard REIT (MRT.UN-T), which was just below the cut-off for the table. Its shares currently lend out at 30 per cent.
Morguard REIT is a deeply undervalued stock, trading in a range around 50-per-cent of net asset value. Cash flows from its dozens of retail and office properties across Canada have been weighed down by online shopping (reduced shopping at malls) and the effects of COVID-19 (many workers continue to work several days of the week at home).
However, activist investor George Armoyan, executive chairman of G2S2 Capital Inc., is steadily acquiring shares in Morguard REIT and its parent company, Morguard Corp. (MRC-T). He now has equity stakes greater than 10 per cent in each.
As with his past campaigns, Mr. Armoyan will likely try to influence the executive team to take steps that revalue the company’s stock price. For example, more capital could be raised to redevelop properties that have enjoyed high population growth around them.
Morguard is also one of the stocks most at risk for a short squeeze (see the Stocks most at risk for short squeezes (March 26) table below).
Top short positions in Canadian stocks
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 26.
Many of the companies have been discussed in previous columns. Here are some that have not yet been covered or need an update.
Propel Holdings Inc. (PRL-T) has moved up to the second most shorted company. It’s a fintech that provides personal lines of credit and loans to people who are not usually serviced by traditional banks.
TMC The Metals Co. Inc. (TMC-Q) is on a mission to harvest minerals and metals from the seafloor so they can be used to make EV batteries, among other things. President Trump has ordered that applications for deep-sea mining be expedited; earlier in March, TMC was the first company to be accepted. However, its stock is down 50 per cent year-to-date as regulatory, operating and financial uncertainties remain, and cash burn is ongoing due to a dearth of sales.
IMAX Corp. (IMAX-N) has specialized projectors for entertaining audiences with unique and immersive motion pictures. Record box office results and new partnerships are fueling positive momentum in its stock. But there have been concerns about overvaluation, the vagaries of box office receipts and the rise of streaming services and Internet entertainment. The short selling may also reflect an arbitrage operation on IMAX’s convertible bonds.
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. For example, in last month’s column, the Top increases in short positions table foreshadowed the precipitous drop in the shares of goeasy Ltd. (GSY-T), a fintech focused on subprime lending. Here is the table for companies with notable hikes in short positions over the past 30 days.
Bausch + Lomb Corp. (BLCO-T) supplies contact lenses and a variety of eye-care products. Although revenue growth has been strong and insiders are buying shares, concerns include earnings losses, margin pressures and a high debt load. Also, favourable clinical trials for some new products have been overshadowed by the ongoing investigations of law firms into possible securities fraud linked to voluntary product recall.
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.
Most shorted ETFs
Short positions in exchange-traded funds (ETFs) can provide a picture of bearish sentiment at the sector and/or stock-market level. Energy EFTs continue to have the highest short positions.
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 Canada, and S3 Partners can provide short positions (currency-adjusted) across both countries. Other data sources for short sales data don’t do this.
For the tables, a cutoff was applied to exclude companies whose short positions were small in dollar value, unless otherwise noted. 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). 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