4 danger stocks during this reporting season

Shorters are targeting these 4 Top 200 companies.

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The reporting season is nearly among us! As is often the case, June and July were filled with the chorus of companies warning the market that their results may fail to live up to previous guidance or expectations.

Discretionary retailers were probably the biggest culprits while there were some high profile names like QBE Insurance Group Ltd (ASX: QBE) that disappointed investors unexpectedly or not.

Shorters!

There is also a group of share market speculators that take 'short' positions in companies listed on the ASX, because they expect the price to fall. To 'short' a stock means that you borrow the stock from an owner, sell it, and then when (or if) the price goes down you buy it back and return it to said owner.

The 'shorter' takes the risk and takes the majority of the profit for a nominal fee paid to the owner. Interestingly, investors can gauge the general mood of investors by the level of short interest in a particular stock or sector.

For example, some of the most heavily shorted stocks (as published by ASIC) are those in the mining services sector, for obvious reasons.

Reporting Season Implications

Heading into August, it's possible to gauge whether other investors believe a company will perform well, or not so well, by the level of short interest in the stock.

Four companies that have seen their proportion of shares short sold increase recently are JB Hi-Fi Limited (ASX: JBH), Super Retail Group Ltd (ASX: SUL), Myer Holdings Ltd (ASX: MYR) and Fortescue Metals Group Limited (ASX: FMG).

The first three have likely been targeted due to the slew of profit downgrades from rivals, while Fortescue is in the sights due to the lower iron ore price over the last six months and the implications of Fortescue's ore being of inferior quality to rivals.

Do Not Fear!

While the positions of shorters should be considered, there's no reason to panic into selling. Indeed these companies have not issued any downgrades to prior guidance in the last month and by all means could outperform this earnings season.

Investors that short companies aren't perfect and will likely not be any more correct than an investor willing to buy a company, but it can be a useful gauge of investor sentiment.

Motley Fool contributor Andrew Mudie owns shares in QBE and FMG. You can find Andrew on Twitter @andrewmudie

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