It started with the Canadian banks. Valeant (VRX.TO -17.67%) was next on the firing line. Then almost every day, a new company was being picked off by short-sellers. Whether based on sound arguments or not, this “short attack” has hurt almost every Canadian investor. Since the spring, Canadian banks have underperformed the broader market three-fold. Valeant and Nobilis Health (NHC.TO -2.64%) have plunged more than 45 percent in October alone. Concordia Healthcare (CXR.TO -7.88%) has been crushed, losing 65 percent of its value since September 4.
What do portfolio managers, CEOs and investors think? We asked them.
Paul Conibear is the president and CEO of Lundin Mining (LUN.TO 4.5%). A few years ago, his company’s shares were “number-two on the short-selling list”. Did he engage with the shorts? “They don’t call us,” he told me (and that's a familiar response from executives). His advice: “You really shouldn’t be adjusting your strategy due to that short-term activity.” Manage your company and your assets well, and the market will take care of itself.
Chris Hensen, a portfolio manager at Manulife Asset Management, highlighted a crucial short strategy. “They really play on myopic loss aversion - one dollar of loss is felt more than one dollar of gain,” he said. This emotional response leads to sell first, ask questions later -- but also opportunity. He’s focused on companies with a high return business, limited leverage and the earnings and growth to support valuation. A sell-off just makes them more attractive.
David Taylor from Taylor Asset Management concluded with something similar. Sometimes the shorts are right on overvalued companies that have made one too many big acquisitions. On the other hand, misdirected selling provides an attractive entry point. He’s been buying Element Financial because he thinks that it has been caught up in the negative dialogue.
I’ve been told by other portfolio managers that the relative illiquidity in the Canadian equity markets aggravates the impact of a short attack. Some argue that where there’s smoke, there’s fire; while others want more regulatory oversight and disclosure. One thing to keep in mind: corporate leverage can cause a lot of pain. Pay attention to the balance sheet.
The final word goes to Brian Belski, chief strategist at BMO Capital Markets. When asked about the shorts, he rolled his eyes and exclaimed, “Come on!” Canada has been beaten up for 12 months and is about two percent of the MSCI global indices. It is kind of late to come in with a short thesis – in particular on the Canadian banks, “the best stewards of capital in the world,” argued Belski.
But, and this is the clincher in Belski's view, hedge funds have been underperforming the broader market by 15 percentage points and they’re looking for any edge to improve that performance -- including targeting Canada’s illiquid market. He called it a lack of independent thought – and a follow-the-leader strategy. He thinks it will backfire and encourages investors to “buy the banks” to benefit, eventually, from a short squeeze.