Potential short squeeze at Mainstreet Equity as issuer bid meets large short position

Good luck being short a thinly-traded, fairly-tightly-held stock at the same time as the issuer is starting your substantial issuer bid.

But this is the state of affairs at Mainstreet Equity Corp., which “could be set up for a short squeeze,” according to one market participant. 

Mainstreet promises to purchase as much as 1.2 million of their shares at $36 a share – a price that is representative of a 14.3% premium within the closing price at the time the program was announced.

If fully taken up, Mainstreet will spend $43.Two million and lower its share outstanding by 11.8 percent based on 10.961 million shares outstanding by March 3. 

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Mainstreet, whose rental revenues are split between Alberta (64.1 per cent); BC (26.3 percent) and Saskatchewan (9.6 percent) is something of the rarity among public companies: Its current substantial issuer bid, which started this week and it is slated to finish on April 12, is the second it’s made. In 2009 it bought back 4.132 million shares at $6.35 a share – which reduced its shares outstanding to 10.356 million.

Around the time Mainstreet announced its substantial issuer bid, the TSX released its consolidated short position report: that Feb 29 report showed Mainstreet’s short position had risen to 772,283 shares. 8 weeks earlier the short position was 683,468 shares. One year earlier (December 2014) rapid position was 431,178 shares: in effect the short position has almost doubled over the past 14 months. At the end of 2013 the short position was a mere 194,874 shares.

So far that strategy has tended to repaid: since January 2015 the stock has tended – but not uniformly – to drift lower until news from the substantial issuer bid caused the stock to pop. It closed Tuesday at XX.

According to seasoned market professionals, reality can arise once the short seller – or perhaps a number of short sellers – decides to consider their hoped-for-profits and canopy their positions. For example:

The stock is tightly held with four shareholders owning about two-thirds from the outstanding shares. The 4 are: Bob Dhillon, the founder and leader (who personally owns 37.66 percent; other insiders own 2.68 per cent); Calgary’s Mawer Investment Management (10.48 per cent); and Toronto’s Vision Capital and Vancouver’s Vertex One holding about 15 per cent. That group are long-term owners and are presumably uninterested in selling their stock to assist a short seller cover the positioning;The stock is thinly traded. According to Bloomberg in the last six months the average trading volume was 10,518 share – meaning it would take 74 days to pay for the short position;It’s expensive to borrow stock to cover. One participant made calls about the price of borrowing 10,000 Mainstreet shares and was told it would be 11 per cent;The shares being bought represent a sizable percentage (about 24 per cent) of the float.

What does Dhillon, Mainstreet’s founder, are saying? Instead of berate rapid seller for having lost faith in the company, he thanked them. ‘I would like to thank the short sellers for giving us a chance to do a substantial issuer bid so that we can create more value for that shareholders.”

And that will occur because Mainstreet trades in a large discount to its net asset value.

bcritchley@nationalpost.com