A hedge-fund analyst once sold short a company in which Sacha Peter had invested. Then he published a critique on it. Did Mr. Peter, author of the Divestor blog, rush to his keyboard to click on the sell button, or log into online forums to urge a squeeze on the short seller? Not at all.
Instead, he rolled up his sleeves and dived into the critique. After reading it, the shares remained in his portfolio and were later unloaded at a profit.
It may not always turn out as well as it did for Mr. Peter, but there is something to be said for monitoring the trades of short sellers to see if any are targeting a stock you hold. As Mr. Peter says, “I very much like reading the short-sale cases of anything I hold. It forces me to check my analysis.”
With that perspective in mind, let’s proceed with this month’s highlights of short-selling activity on the Toronto Stock Exchange (TSX).
Bearish bets at the market level
The short position in the iShares S&P/TSX 60 ETF has rocketed upwards during the month to July 15, reaching an estimated $2-billion. The spike seems to have been triggered by concerns over the surge in new variants of COVID-19 and the pressure that rising inflation is putting on the Federal Reserve to stop pumping stimulus.
Activist short sellers
Six new campaigns were initiated by activist short sellers against Canadian companies in the first half of the year, according to Breakout Point. Eight campaigns were initiated last year during the first half.
Activist short seller targets in Canada in the first half of 2021
| COMPANY | | ACTIVIST SHORT SELLER | DATE PUBLISHED |
| Reconnaissance Energy Africa Ltd. | RECO-X | Viceroy Research | 24-Jun |
| Cielo Waste Solutions Corp. | CMC-CN | Night Market Research | 21-May |
| Pyrogenesis Canada Inc. | PYR-T | Mariner Research | 28-Apr |
| Well Health Technologies Corp. | WELL-T | GRIZZLY RESEARCH | 23-Apr |
| Mountain Valley MD Holdings Inc. | MVMD-CN | Night Market Research | 25-Mar |
| Exro Technologies Inc. | EXRO-T | Mariner Research | 2-Mar |
| |
Source: Breakout Point
The companies are focused on: oil exploration in Namibia (Reconnaissance Energy), conversion of garbage into diesel (Cielo Waste Solutions), plasma torches and 3D printing (Progenesis Canada), healthcare and telemedicine acquisitions (Well Health Technologies), COVID-19 and biotech treatments (Mountain Valley MD Holdings) and clean technologies (Exro Technologies).
The activist short sellers have published research reports on their websites; many of the companies have posted replies on their websites. Shareholders might want to check them. If you aren’t a shareholder, the reports and rebuttals can still be an education in the red flags to look for when doing due diligence, for example aggressive accounting, weak disclosure, and related parties.
Cost to borrow shares
Academic literature finds that short sellers are usually informed investors skilled at processing information, as demonstrated by highly shorted stocks having a tendency to deliver lower returns. A November, 2020 paper, The Loan Fee Anomaly: A Short Seller’s Best Ideas, by Joseph Englberg and four other academics, finds that when short sellers have bid up the cost to borrow a stock, it also foreshadows lower returns.
In fact, they find that loan fees forecast the “highest monthly long-short return” than any of the factors that other academic studies have found significant. “We find that equity loan fees are the best predictor of cross-sectional returns,” conclude the authors.
It thus seems worthwhile to include cost-to-borrow data in the updates on TSX short-selling activity. A ranking of stocks by borrowing costs turns up a lot of micro- and small-cap companies in the top-20. At this size, constraints such as low trading volumes and brokers’ short-selling restrictions may be in play.