Short selling is one of those topics that often gets misunderstood by newer investors. When investors hear that a TSX stock is seeing a lot of short selling or has a high short interest, the instinct is usually to assume something is wrong with the business. In reality, short selling is just another tool that traders use to express a view on valuation, timing, or risk.
At its core, short selling is a simple concept and is basically the opposite of buying a stock. Instead of owning shares because you think the price will go up, you short-sell because you expect the price to fall.
So, rather than buying the shares outright, you first borrow them from someone who owns them, which isn’t free, and then sell them today, hoping you’ll be able to buy them back later at a lower price. It’s still buy low, sell high; you’re just reversing the order.
Unlimited downside
If the stock falls, the short seller profits. However, here’s the difference: if the stock rises instead, the potential loss can be unlimited.
That makes short selling extremely risky, and because of that risk, along with the cost of borrowing shares, short sellers don’t usually hold positions for long periods the way long-term investors do.
On the TSX, stocks seeing higher levels of short selling often fall into a few common categories. They’re typically either cyclical businesses near peak earnings, companies facing uncertainty around margins or cash flow, or stocks that have rallied hard and now look expensive based on near-term fundamentals.
That doesn’t necessarily make any of these stocks poor investments. However, it does suggest that the market is a lot more conflicted and uncertain about those names.
So, with that in mind, let’s take a look at some TSX stocks seeing the most short selling today.
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Which TSX stocks have seen the most short selling of their shares?
One of the heaviest shorted stocks on the TSX is Cineplex (TSX:CGX), with nearly 12% of its shares outstanding being short.
Cineplex has had a long and bumpy recovery since the pandemic, as the industry continues to shift and streaming grows in popularity.
Furthermore, given its significant debt load, while it’s certainly a turnaround candidate, there’s also considerable risk, making it understandable why it’s seeing some of the highest short selling of any stock on the TSX.
In addition to Cineplex, Cargojet (TSX:CJT) is another stock seeing a lot of short selling, with nearly 8% of its shares outstanding sold short.
Cargojet has a significant long-term opportunity as e-commerce continues to grow in popularity. However, in the near term, with a tougher economic environment weighing on discretionary spending, the stock has struggled, attracting more short sellers and keeping the stock unbelievably cheap.
So what should investors actually take away from this?
When you find a TSX stock that’s seeing a lot of short selling, it doesn’t necessarily mean it’s a bad investment or that it’s destined to fall in price. It simply means you need to be more aware and understand why the stock is seeing higher short interest. It’s a reminder to dig deeper, understand what the market is worried about, and make sure your investment thesis isn’t ignoring real risks.
You can still believe a company like Cineplex or Cargojet, for example, will turn its business around and continue to recover, while also recognizing the real challenges they face.
If anything, understanding why investors are short-selling a stock and then disagreeing with that view is actually better. At least you know there isn’t some hidden reason the stock could be a bad investment.
And high short interest doesn’t mean a stock should be avoided altogether either. In fact, it can sometimes create an opportunity.
Stocks with high short interest have the potential to rally sharply in what’s known as a short squeeze. Because short selling is risky and losses are unlimited, short sellers are often quick to buy back shares if the stock starts moving higher. That rush to cover can push prices even higher and accelerate a rally.
So, while short selling itself is bearish, a TSX stock seeing heavy short selling isn’t automatically a bad sign. It’s just a reminder to do your homework and fully understand the stocks you’re buying for the long haul.
