What’s the story?
The talking heads of TV, newspaper and media today are broadcasting the “TD Bank is the most shorted bank globally.”
First, what does it mean to be “short” a stock? Well, that is when investors sell a stock before they own it. The idea being they think the shares will go down and that’s when they buy it back at a cheaper price the difference in price is their profit. It’s trading but in reverse. Financial regulators keep a record of investors that are selling stocks without owning them because in order for that to work they need to have borrowed the stock first. (Details that don’t concern you as we don’t short stocks.)
Here is a situation where headlines can make things sound much worse than it actually is. Here are some facts to consider surrounding TD Bank:
TD is making headlines this morning with news sources citing it as the biggest bank short globally. Sure, there is C$5 billion shorted and it might be the most shorted bank from an absolute dollar basis, but perspective is required. What matters more, is the percentage of the float that’s being shorted and it seems that’s just around 3.3% vs 2.8% last year. For a bit more context, short interest for the rest of the Canadian bank group is: CIBC 4.2%, National Bank 3.2%, Bank of Nova Scotia 2.8%, Bank of Montreal 2.2%, and Royal Bank 0.6%.
Typically, short interest above 7% is where you start paying closer attention. Furthermore, from listening to the RBC Capital Markets institutional call this morning, it appears investors view TD as a merger arbitrage play given it is expected to renegotiate its deal to take over Tennessee based First Horizon Corp. So this could be driving some of the short interest. Long story short, while there are many reasons to be less than excited about the bank group in general (including TD), I am suggesting you shouldn’t put much weight in the short interest headlines at this time.
TD Bank shares are down about 1.4% today and that means the stock is now trading at a 7% discount to the group vs its 10 year average premium of 3%. Therefore, I am not recommending you sell TD at current levels. (Sure we could sell TD if you need cash for withdrawals and rebalancing etc. but not simply because of this news.)
- there will be a time that it makes sense to buy some of these banks stocks on weakness. Just not quite yet.