Semafo: Should You Worry About The Short Sellers?

For those who have ready about my 2020 Canadian Equity Portfolio, you may have noticed I have dedicated a small (2.15%) portion of my portfolio to Semafo, a gold mining company with activities in Burkina Faso as well as exploration strategies in West Africa. The political risk is no doubt high, but it made its way into my portfolio due to its low market correlation and good long-term historical returns.

Apart from these benefits I had identified in my normal annual modeling process, I noticed that Semafo had the single highest open short position increase in the IIROC’s most recent report dated as of December 15, 2019. The company’s total open short positions now sits at 8,120,875, about 3.4 million more than the prior report two weeks earlier.

Short Sellers are betting against the stock, hoping that they can buy the stock at a lower price and sell it back to lender and make a profit. Most casual investors do not engage in short selling, so it seems reasonable to assume short selling is where the “smart money” goes. Naturally I’m biased in this situation as I have a position in the Company, but I would like to offer up the following counter point to those who may feel concerned about its rather high number of short positions:

In an analysis looking at price movements and the short interest ratio (calculated as open short positions divided by average 30-day trading volume), I found almost no correlation between the two (-0.03 to be exact). This is to say that there’s evidence, at least in the year’s worth of data I’m using, to suggest that price and open short positions move independently of each other. Therefore, investors need not worry about its short interest ratio as other things are affecting its price much more. I’m going to have to assume those things are its fundamental metrics, which hopefully I have correctly taken into account in my portfolio construction.

I feel that looking at the price-short interest ratio correlation on an individual security level is the best approach rather than taking a one-size fits all approach to this popular contrarian indicator. Using the same methodology, I found stocks that have highly negative correlations between the price and short interest ratio (Baytex Energy: -0.52; Encana Corporation: -0.52, Canopy Growth: -0.43), and those which have highly positive correlations (CIBC: +0.64; Magna International: +0.55, ShawCor: +0.55). Simply put, if you’re going to use technical analysis for one contrarian indicator, you at least have to look at the other technical indicators (i.e. price action) as well.

In the case of Semafo, its lack of correlation translates into a lack of concern for me.

Feel free to leave any questions or comments below!