Short sellers borrow shares from the prime brokerage arms of investment banks like UBS to sell on market and then try to buy them back later at a cheaper price to return to the lender while pocketing a profit.
Short selling can be a high-stakes game though as short sellers tend to hunt in packs which means trades become crowded and likely to unwind violently if a heavily short sold company beats the market's expectations.
Below I have five companies heavily shorted that may rocket or plunge in price depending on their next financial updates. So let's take a look at what might be behind the short interest. All stats correct as at March 9 according to ASIC's daily report.
Myer Holdings Ltd (ASX: MYR) has 15.52% of its shares shorted and will report its half-year results tomorrow which will include the crucial Christmas trading period. The stock is being shorted on expectations of weak sales as the department store falls out of fashion, although if it produces more same-store sales growth it could rocket above today's $1.14 share price.
Aconex Ltd (ASX: ACX) has a whopping 17.22% of its shares shorted as some hedge funds seem to believe this construction industry software-as-a-service business is still heavily overvalued given the modest underlying growth rates. Questions have also been raised about the growth and performance of its Conject acquisition in Europe. Expect the Aconex share price to remain volatile.
Vocus Group Ltd (ASX: VOC) has 11.5% of its shares held short presumably as speculators bet it will not meet its full year EBITDA guidance of between $430 million to $450 million. At $4.22 the share price looks to have a downgrade virtually priced in already and given the group will enjoy a full half-year contribution from Nextgen plus cost savings in H2 2017 I expect it to comfortably meet guidance. Expect the shares to rocket higher if the company meets its own forecasts.
Mayne Pharma Group Ltd (ASX: MYX) has 9.3% of its shares held short presumably as investors bet that regulatory investigations in the company's core U.S. market will have an adverse impact on its valuation after it spent $889 million on a portfolio of U.S. drugs. If I were a Mayne Pharma shareholder I would be nervous over its outlook..
Blackmores Limited (ASX: BKL) has 7.01% of its shares shorted as traders presumably bet its third quarter sales results won't be strong enough to justify its current valuation. Given its chief executive, directors, Head of Asia and Company Secretary have been buying shares during the current quarter I expect the business is performing reasonably well. The main focus will soon turn to growth in FY18 for Blackmores, although it's tough to know which way its shares will track over the short term.
