If you’ve been interested in investing (or social media, or gambling, or sports – this situation has widespread appeal!) and have following the news, there’s no way you could have missed the GameStop saga. What started as an audacious move by Redditors to challenge the status quo in financial markets, quickly captivated the imagination of new and experienced investors alike, and brought short-selling into the limelight.
In an attempt to drive up prices of certain nostalgia-tinged U.S. (GameStop was not the only one) and play professional money managers at their own game, the social media driven day traders created a short squeeze, a move usually associated with hedge funds, as my colleague Dave Sekera explains.
GameStop and the Short Squeeze
A short squeeze involves trying to manipulate the price of a share upwards to flush out those who are betting that the price will fall. “When someone shorts a stock, they’re trying to sell something that they don’t actually own because they think they can make money later by buying it back at a lower price. Hedge funds do this a lot, but short-selling can be very complicated and risky for individual investors to attempt,” Morningstar director of investor education Karen Wallace explains.
Short-selling can be a highly profitable way to exploit the falling share price of companies in distress, my colleague James Gard points to German fintech company Wirecard as an example. Not in the of the stocks involved this time around, including AMC, Blackberry and Bed, Bath and Beyond. It’s just that the businesses are out of favour for a variety of reasons; professional money managers shorted them, and day traders have (so far) won this particular tug of war.
Gard warns that short-sellers can come a cropper too; Jupiter Absolute Return fund manager James Clunie held a short position in Tesla going into 2020 when the shares rose 700% and left the asset manager at the end of the year.
Canada’s Most Shorted Stocks
Let’s see if the exuberance of the situation in the U.S. has transferred to Canadian stocks. Morningstar director of investment research Ian Tam used Morningstar CPMS to look for the most shorted stocks in Canada. He used Short Interest as a percentage of Market Float, as opposed to total shares which is a more relevant measure. “It measures shares not owned by majority shareholders, i.e. those available to investors” he explained.
Here are the most shorted stocks in Canada:
| Company | Net Short (%) | 2020 Return (%) | YTD Return (%) | Economic Moat | Morningstar Star Rating |
| Great-West Lifeco Inc. | 10.27 | -3.48 | -3.72 | None | 4 |
| High Liner Foods Inc | 9.40 | 37.55 | 2.25 | ||
| Paramount Resources Ltd | 7.87 | -33.69 | 44.80 | ||
| Savaria Corporation | 7.63 | 7 | 19.23 | ||
| Morguard REIT | 7.34 | -48.85 | -1.67 | ||
| Village Farms Int'l | 7.24 | 59.73 | 22.89 | ||
| Loblaw Companies Ltd. | 7.05 | -4.34 | 0.33 | None | 4 |
| West Fraser Timber Co. | 6.72 | 44.17 | 4.16 | None | 2 |
| Tamarack Valley Energy | 6.56 | -36.5 | 8.66 |
Source: Morningstar CPMS and Morningstar Direct Data as of Feb 1, 2020
Of the list, Morningstar analysts cover only three – Loblaw’s, West Fraser Timber, and Great-West Lifeco. Two are currently undervalued and have four stars. None have a competitive advantage or an economic moat.
What Should You Do?
As Morningstar behavioural researcher Sarah Newcomb points out, investing is not gambling.
“Put simply, a group of investors got organized and found a few companies whose price they could manipulate if they acted en masse to create a microbubble, if you will. Playing the game of price arbitrage is, in this context, both legal and fun, but it is also based largely on speculation about human behaviour, not underlying value. Wise investors will see it for what it is: a temporary price adjustment based on nonfundamental factors. Speculation is fun. It's why a lot of people love investing, and if you speculate with only money you can afford to lose, events like these can be exciting and sometimes profitable. Still, if you are new to investing, don't understand the difference between fundamental value and market price, or you are considering putting money on the line that you need for your present or future security: stop, breathe, and walk away. No crowd of anonymous Redditors deserves your life savings, period,” she says.
Editor's Note: An earlier version of this article included Thunderbird Entertainment as one of the stocks shorted. This was due to an error in the data, and the stock has been removed from this list.
