Short-seller plans to target more Canadian companies.

Same firm that targeted Dollarama

TORON TO • Spruce Point Capital Management LLC, the New York short-selling firm that targeted Montrealbased retailer Dollarama Inc. last year, is planning to take aim at more Canadian companies, Ben Axler, the firm’s founder and chief investment officer, said Monday.

“We’re going to do more Canadian activism, definitely,” Axler told the Financial Post after speaking on a panel about activist investing at a Canadian Club event in Toronto.

He declined to identify any specific new targets, but suggested they are likely to share characteristics with past ones such as Dollarama, which Spruce Point said was overvalued by about 40 per cent, and space tech firm Maxar Technologies Ltd.

Axler said he finds Canada’s relatively small market appealing because there are fewer analysts, particularly forensic analysts, tracking companies.

“We view that as a market opportunity,” he said, adding that a growing base of retail investors in certain sectors provides a ready audience for activists seeking to make an impact. “We think Canadian shareholders are more apt to listen to an activist,” he said.

Dollarama stock has been climbing so far this year, regaining some of the ground it lost after last year’s Spruce Point report and a general market decline. Maxar stock hasn’t bounced back from a slide that began in mid-2018.

Activism is already “off the charts” in Canada, with 22 short campaigns last year alone, said Patricia Olasker, a partner at Davies Ward Phillips & Vineberg.

Axler, whose firm has targeted companies from North America to Australia to China, criticized managers who pursue unsustainable returns, use short-term funds to pursue share buybacks, and pay themselves well despite missing targets.

Conditions are ripe for activism in a bull market, where “excessive valuations” are common, he said. While some companies are rising with the tide, analysts tend to be unified in assigning ‘buy’ recommendations.

Short-sellers create a “natural counterbalance,” in these circumstances, he said.

Axler said he attended the Toronto event to stake Spruce Point’s claim as a “fact-based” short-seller, firmly outside the camp of “short and distort” players who use misleading facts to drive down a share price and profit from the decline.

“That’s not the type of activism we want to engage in,” he said. “The downside is there are others who might.”

Canadian market watchdogs are in the initial stages of a probe aimed at uncovering “the nature and extent of abusive short-selling” in the marketplace. But Axler said he views the regulatory environment in both the U.S. and Canada as positive for short-sellers.

“The regulatory environment is actually an opportunity for third-party activists to come in,” he said, adding after the panel discussion that regulators, particularly in the U.S. under the Trump administration, are hampered by limited resources.

This creates a “need for short-sellers” and they are “filling that void,” he said.

“We can highlight problems as we see them. (Then) it’s up to the market to decide.”

The panel discussion included Sunny Puri, an analyst at Anson Funds, and David Salman, president of Laurel Hill.

Puri said some sectors appear ripe for activist activity, including Canada’s cannabis industry, where fortunes rose at a frenzied pace ahead of October’s nationwide legalization.

“There are a few quality companies,” Puri said, adding that many of the rest don’t justify their valuations. He compared the intense interest from retail investors — and the likelihood of a boom followed by a bust — to crypto-currency a year earlier, and mining a decade or so before that.