I have written often about the reasons I view short interest as an important part of my research. Short interest is of course fundamental data, but rather than being weeks or months old, with the Canadian listed stocks I hold I am able to get updates twice a month, and when the new numbers come out its only 3 days old.
I've shared these views before, but I believe they bear repeating.
In my younger days I viewed bears as an enemy to be defeated, I dreamed of short players being forced to cover off large positions resulting in a squeeze play that would send a stock sky rocketing. I long ago consigned that view to the trash bin. My older and wiser self knows that it is never wise to underestimate an opponent, that holds true on the battlefield, in a sporting arena and with the public equity markets.
Short selling comports huge risk. When going long the amount that can be lost is fixed, if you buy 10,000 shares of a stock trading for $1 the most you can lose is $10,000 because a stock cannot drop below $0.00.
But go short 10,000 shares on a stock trading for $1.00 and the potential for losses is theoretically limitless. Those 10,000 shares borrowed and sold into the market at $1.00 have to be bought back on the cover, unless the PPS goes to $0.00 in which case the short seller books $10,000 in profits less fees.
But if the stock climbs, then the potential for losses climbs. At $2.00 a short seller is down $10,000 at $3 he's down $20,000....and keep adding $10,000 for each dollar the PPS climbs. And if the stock keeps climbing, then the short seller must keep putting money into his margin account to protect his short position.
If the margin requirements are not met then he can be forced to cover. Can you imagine being short 10,000 shares at $1 on a stock that goes to $10? The short seller could be forced to buy back his short position for $100,000 when the short sale only netted $10,000.
It is because of this kind of risk that short sellers like Hedge Funds are notorious for going full tilt on their research and due diligence, with reports of some even combing through the trash of public companies to get the inside scoop. And it is because of this that I now stay away from investing in companies that have a significant number of shares shorted, say 10% of the outstanding or more.
Of course there are a couple other reasons for going short. One is fairly benign. Market Maker broker dealers (MMs for short) that are quoting a bid and ask have an essential function in the market, they provide liquidity. A lot of stocks out there are thinly traded, but because of MMs those looking to buy can always find a seller, and those looking to sell can always find a buyer. Because of this essential function MMs can end up short, not because they're bearish on a company but simply because they got hit with buy side interest when no sellers were available.
The other reason is less benign, its sometimes referred to as shaking the tree. A major player can work a stock up and down by using short selling when a stock hits the top of his buying range. This can increase volatility and cause some longs to bail out, allowing the big player to accumulate a large position, covering off his short sales and then adding to a position. In this way short selling can actually be seen as a positive.
Alright, that's enough preamble. Now onto the three stocks mentioned in the subject line: RVX, ACU and CUB all traded in Canada. I have written about all three before here at ATB, and both RVX and KUB are up significantly since I first profiled them here, while ACU is down a couple of cents.
Please note that I have long positions in all three of these stocks so my opinions are biased and should be viewed in that light.
Resverlogix: RVX.TO or RVXCF OTCBB
Up to November 30th 2016 shares shorted is listed at 107,542 which represents 0.10% of the 105 odd millions shares issued. You would have to go all the way back to July of 2015 to find a higher number. As recently as May of this year the number was just 1,500 and it has been climbing almost non stop ever since, but only incrementally, one tenth of one percent of the outstanding is hardly a massive number.
With RVX I consider it very possible that short selling is being used as a means to "shake the tree", to push the PPS around in other words in an effort by smart money players to accumulate on a long position.
The company just put out news today (Monday December 5th, 2016) announcing a second positive recommendation from the Data and Safety Monitoring Board (DSMB) for the continuation of the company's Phase III trial of Apabetalone called BETonMACE. The first patients were dosed over a year ago now and the DSMB noted no safety or efficacy concerns and recommended the trial continue without modifications.
BETonMACE is attempting to show that Apabetalone will reduce the incidence of Major Adverse Cardiac Events (MACE) in patients suffering from Diabetes Mellitus, which is a fancy way of saying full blown insulin dependent Diabetes.
Here's a link to that news:
Aurora Solar Technologies: ACU.V or AACTF OTCBB
Short interest for ACU is so low it might as well be 0, although the actual number is 2,000 current up to November 30th 2016. That's only 0.01% or one one hundredth of one percent of the roughly 39.6 million issued shares.
Trading in this stock has really thinned out, and there hasn't been any news of any consequence since October when the company announced a repeat order from one of their customers.
Cub Energy: KUB.V or TPNEF OTCBB
KUB on the other hand does have some short selling going on, like RVX not a huge amount by any stretch, but enough to be noteworthy in my opinion. Up to November 30th 2016 the number comes in at 146,400 which is 0.05% of the roughly 312 million issued.
Again, its not a lot, and as with RVX I consider it very possible that short selling is being used as a means to shake that proverbial tree in an effort by some smart money players to accumulate. Back in October the number climbed over 200,000 but then came down in subsequent periods to just 23,000 and then 16,000 before this most recent update took it back up to 146,000.
Cub Energy has basically no news, the last PR of any note was on November 16th when the company released its 3rd quarter numbers. And unlike RVX and ACU volumes for KUB are much more robust, it has traded at least 1 million shares per day over the past 4 sessions and traded over 14 million shares on November 17th, the day after they released their quarterly results. November 17th saw the PPS close at 3 cents, the most recent close was 5 cents and that is just .005 from the 52 week high.
Summary
Taking everything into account I think RVX presents the biggest possible upside if they succeed with their Ph III trial, but it could be a long wait and there is a big risk that their trial could ultimately fail.
ACU appears to be a stock that is drifting right now. Its a stock that has seen significant volumes taking place in quick bursts every two to three months, the last one being in late October. If the pattern holds it would be January or February before the next one. However I have to wonder if the election of Donald Trump hasn't taken some of the wind out of the sails in the New Energy space.
KUB I believe presents the best prospects in the very near term, that is based on the chart, on the fact there is precious little news, no hype and zero promotion that I can find. Should those elements come into play I think there's a great narrative here given that Cub Energy is focused on the Natural Gas market in Ukraine, and with the conflict in that region subsiding I very much like the chances of KUB.V returning to the levels it was trading at back in 2013, that is in the 20 to 30 cent area.
Comments are always welcome, just keep the language polite.
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