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The 3 Largest Short Positions on the TSX

Twice a month the Toronto Stock Exchange publishes the 20 largest short positions in the Canadian market.

Before jumping into the list, it’s important to realize that a short position is not always used as an outright bearish bet on a specific name.  Short positions are also used to implement what’s known as a “pair” trade (aka market neutral strategy).

This involves an investor taking a short position in one stock and offsetting it with a long position in a related company.  This type of trade pays off if the long position goes up more, or down less, than the short position and is primarily implemented to reduce market risk in the portfolio.  It does not necessarily mean the investor is absolutely negative on the stock that is sold short.  Just relatively negative.

With that tid bit in mind, these three companies were at the top of the TSX list at the end of February:

Manulife Financial (TSX:MFC,NYSE:MFC)

Topping the list was the financial services giant Manulife.  From the middle to the end of the month, the outstanding short position moved from 52.5 million shares to 77 million, a net change of 24.5 million shares.  Manulife shares have had a strong start to 2013, moving ahead by 14.2% vs. the S&P/TSX Composite advance of 3.0%.  Broad strength in global equity markets as well as a lift in bond yields have contributed to Manulife’s climb.  If these variables continue on their current path, Manulife’s shares can be expected to continue on their current path as well, thus inflicting some pain on the company’s naysayers.

Lundin Mining (TSX:LUN)

Lundin’s short position stood at 68 million shares at the end of February, up from 66 million in the middle of the month.  The company is a diversified miner of base metals with operations in Portugal, Sweden, Spain and Ireland that produce copper, zinc, lead and nickel.  Like most resource companies, Lundin shares have been under pressure in 2013, sinking by close to 6% year to date.  According to Capital IQ, the consensus recommendation for Lundin is “outperform”.  “Outperform” what you ask?  Those who’ve taken a bearish stance on the name hope the answer is “nothing”.

Bombardier (TSX:BBD.B)

Bombardier is one of the most liquid stocks on the Canadian exchange and therefore a relatively easy name to short.  The company’s results are tough to predict as demonstrated by the most recent release, and this can result in large swings in the share price.  On top of this, Bombardier has a significant amount of financial risk embedded within it.  Large outstanding debt and a sizeable pension deficit could leave Bombardier struggling to keep the lights on should the global economy ever fall back into a funk.  Exactly the outcome many shorts are hoping for.

The Foolish Bottom Line

The paired trade angle explained in the opening is a legitimate reason for the appearance of two of these names.  Many of the outstanding shorts on Manulife and Lundin are probably paired with offsetting longs in peers as opposed to outright bearish bets against the companies.  Given Bombardier’s financial risk, the same cannot be said for this maker of planes and trains with any degree of certainty.  The company’s liquidity and puny dividend make it an easy one for short sellers to bet against.

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Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

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