There is no question that the Gamestop saga brought short-selling to the attention of investors in early 2021.
In fact, many new retail investors prior to the madness in late January didn’t even know what a short sale was. Now, looking up the most heavily shorted Canadian stocks on the TSX Index is commonplace in many investors' routines.
Which Canadian stock has the biggest short interest right now? Well, that would be a small cap environmental company called Dirtt Environmental Solutions Ltd (TSE:DRT).
Are investors right in shorting the company’s shares, or are they making a mistake?
Lets take a look.
What exactly does Dirtt Environmental Solutions (TSE:DRT) do?
When you look at the name, the company seems like somewhat of a renewable energy company, or maybe a waste disposal operation.
However, Dirtt Environmental Solutions is actually a construction company in the sense that they build pre-fabricated interior construction solutions and sell the materials to clients. So, if you’re looking to use Dirtt on your project, you could head to its website and use its 3D software to develop and plan a project. Dirtt would then produce the necessary materials to complete the project.
It is a unique business model, and the company claims it is environmentally friendly in the fact that its business results in less waste, less power and water usage, and that their products are built with sustainable materials.
Now we know what Dirtt does, lets have a look at why this is the heaviest shorted stock on the TSX Index right now.
Shrinking growth a poor sign for a small-cap growth company
The company has been mired in inconsistency, posting negative net income in 4 of the 8 years its been trading...
Dirtt doesn’t pay a dividend. As a result, its primary method of keeping shareholders happy is through top and bottom line growth resulting in share appreciation. Unfortunately, it hasn’t done much of that since 2018.
The company has been mired in inconsistency, posting negative net income in 4 of the 8 years its been trading. Negative net income with a growth stock isn’t the end of the world. But, it’s the pattern that Dirtt is going through that makes it more concerning. The company went through a 4 year stage in which it was profitable in 3 of them.
Moving forward, the company has posted negative net income in 2 of the last 3 years. We can give somewhat of a pass in 2020 due to COVID-19, as the company not only saw net income dip but revenue drop by 30% as well. But, this is a company where all signs are pointing to stalling or slowing growth, and they’re newer in terms of their history as a publicly traded company.
2021 is not off to a hot start either
The company reported first quarter 2021 earnings, ones that missed on the top and bottom line by a significant margin. It posted a loss of $0.226 when a loss of $0.095 was expected and revenue of $36 million fell short of estimates by over $10 million.
Interestingly enough, this is when short interest got drastically higher for the company. Investors who were maybe expecting a comeback in 2021 are now betting on the company to fall short, using its first quarter earnings as a catalyst.
Overall, the short interest in Dirtt isn’t really surprising
When we look at analyst estimates for the company moving forward, they don’t expect Dirtt to return to revenue levels witnessed in 2019 until well past 2023. And although we can blame the pandemic, the top line of the company had been shrinking prior to COVID-19.
It’s never a good sign when you see this, and as a result the stock has been in a steady downtrend since mid 2019. It’s extremely inconsistent when it comes to meeting expectations, and this one may be a long ways from a recovery to 2019 highs.
As a result, it’s not surprising at all to see around 5.55 million shares of 84.69 million total sold short. Until you see the company start turning things around, you’re likely to see heavy short interest against it. Renewables is another market people are looking towards in terms of environmental impacts. Greenlane Renewables (TSX:GRN) saw a pull back that has some investors wondering if it is worth having on the watch list.