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Why you should avoid the top 20 most shorted shares on the ASX

Recent big share price falls for Dick Smith Holdings Ltd (ASX: DSH) and Slater & Gordon Limited (ASX: SGH) have taken some investors by surprise. It will always be great if investors could assess how likely it is that the share price of a company will fall. A list of short positions can provide valuable clues.

There are investors in the market who specialise in making money on falling share prices. The process is called a short position, where certain investors bet that the share price of a company will tank based on their independent research and assessment.

A review of the top twenty short positions on the Australian Stock Exchange (ASX) can give investors some idea as to which companies are on the radar of experts in creating short positions.

Here we look at the top twenty short positions on the ASX & CHI-X as at 25 November, 2015.

Company Name % of issued capital reported as short.
Metcash Limited (ASX: MTS) 24.33
Myer Holdings Ltd (ASX: MYR) 19.14
Monadelphous Group Limited (ASX: MND) 16.65
JB Hi-Fi Limited (ASX: JBH) 15.92
Slater & Gordon Limited (ASX: SGH) 15.37
Mineral Resources Limited (ASX: MIN) 14.14
Orica Ltd (ASX: ORI) 13.49
Flight Centre Travel Group Ltd (ASX: FLT) 13.47
Cabcharge Australia Limited (ASX: CAB) 12.67
Greencross Limited (ASX: GXL) 11.07
Alumina Limited (ASX: AWC) 10.72
AWE Limited (ASX: AWE) 10.66
Dick Smith Holdings Ltd (ASX: DSH) 10.15
Super Retail Group Ltd (ASX: SUL) 10.07
Worleyparsons Limited (ASX: WOR) 9.92
SEEK Limited (ASX: SEK) 9.79
Primary Health Care Limited (ASX: PRY) 9.67
G8 Education Ltd (ASX: GEM) 9.66
Western Areas Ltd (ASX: WSA) 9.56
Woolworths Limited (ASX: WOW) 9.35

Source: Australian Securities & Investment Commission. (ASIC)

Some of the names in the above list are well known, like Cabcharge Australia Limited (ASX: CAB), Myer Holdings Ltd (ASX: MYR), and Woolworths Limited (ASX: WOW). There are specific reasons that their names are in the list for short positions. For example, Cabcharge is on the list because of the new competition from taxi industry disruptor Uber. Similarly, everyone knows about business difficulties being faced by Woolworths.

A short position in a company is by no means a firm verdict that the business performance will definitely deteriorate. It does however imply that certain investors do believe that will be the case and they could be proven wrong.

Foolish takeaway

Creating a short position requires some level of expertise, and is not an easy task. However, a Foolish investor can benefit from the list, as it can give some hints as to which companies could be dogs of the future. I would personally stay away from at least the top 20 companies on the list of short positions, unless I have a compelling reason to believe that market has got it wrong.

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Motley Fool contributor Qaiser Malik has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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