An opportunity in 5 of the most shorted stocks on the ASX?

Have short sellers got these stocks right?

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Short selling is a practice by which market participants borrow stock in a certain company and sell it on the market. These short sellers then hope to buy back the stock (at a lower price) and return it to the lenders (to whom they also pay a fee for the privilege of borrowing the stock).

Short sellers run into trouble when the share price of a company spikes, because they have to “cover the short” in order to limit their liability to stock lenders. When a stock is particularly heavily shorted, short sellers can send the stock price up very quickly, if they all rush to cover the short on the release of positive news.

Here is a selection of the most heavily shorted stocks on the ASX…

Company Percentage of shares sold short
Cochlear Limited (ASX: COH) 18.2%
Acrux Limited (ASX: ACR) 13.4%
Monadelphous Group Ltd (ASX: MND) 12.8%
JB Hi-Fi Limited (ASX: JBH) 12.6%
Reject Shop Ltd (ASX: TRS) 11.8%

 

Short sellers are obviously expecting a disappointing result from Cochlear when they report full year earnings in August. But, in the past three months the share price has risen 8%, and if the company’s range of new products follows the trend of past products, short sellers are likely to get hammered.

Acrux has been hit because of an FDA investigation that could affect the biotech’s most well-known products, Axiron. Fears may be overblown, and a positive FDA outcome could see the shares soar.

Monadelphous Group, on the other hand is in the struggling mining services sector. Further falls in the share price are likely, as the downward trend in mining capex continues. We are far from the bottom yet, and the pressure on the company is unlikely to let up anytime soon.

Give the recent positive announcement by Dick Smith Holdings Ltd (ASX: DSH), JB Hi-Fi could well be an opportunity to buy up on the cheap. The company could positively surprise the market when it reports in August.

The Reject Shop has had its fair share of issues this year, causing its share price to more than halve. More negative announcements are a possibility, but overall these appear to be short-term in nature. For those investors looking out to the long term, Reject Shop may also be an opportunity to get set in a stock at a cheap price.

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Motley Fool writer/analyst Mike King owns shares in Cochlear. You can follow Mike on Twitter @TMFKinga

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