Should you sell the top 12 most shorted shares on the ASX?

Thanks to movies like ‘The Big Short‘ and a number of high profile corporate collapses, short selling is gaining a much broader level of coverage amongst the wider investment community than it used to.

For those who are unfamiliar with short selling, it involves selling shares that you do not own, with the intention of buying them back sometime in the future. You would enter a short position with the aim to profit from a stock price decrease, by selling at a higher price and then buying back at a lower price.

Just over the past week or so, the media has focused on the increased level of short selling in our major banks stemming from hedge funds taking bets that our banks are facing significant economic headwinds and are exposed to a residential property market resembling a ‘Ponzi scheme’. This would have seemed unthinkable a year ago but that hasn’t stopped hedge funds from betting $8 billion against them.

Although short selling is not an investment tool generally available to mum and dad investors directly, it is still important to be aware of which stocks are currently being short sold and the reasons behind this.

Remember, someone short selling must be confident the share price is going to fall and they should have a reason behind it.

Based on the most current data from ASIC, (which is always delayed by four trading days). Here are the top dozen stocks currently being short sold:

Ranking Stock % short sold
1. Myer Holdings Ltd (ASX: MYR) 20.73%
2. Metcash Limited (ASX: MTS) 19.05%
3. Monadelphous Group Limited (ASX: MND) 17.58%
4. Orica Ltd (ASX: ORI) 13.75%
5. Flight Centre Travel Group Ltd (ASX: FLT) 13.56%
6. Primary Health Care Limited (ASX: PRY) 13.49%
7. Western Areas Ltd (ASX: WSA) 12.52%
8. Greencross Limited (ASX: GXL) 12.27%
9. Worleyparsons Limited (ASX: WOR) 12.12%
10. Cabcharge Australia Limited (ASX: CAB) 12.05%
11. Alumina Limited (ASX: AWC) 10.95%
12. Mineral Resources Limited (ASX: MIN) 10.63%

From the list of shares in that table, I would only consider investing in two – Greencross and Flight Centre.

The remaining companies are either facing significant headwinds or lack the financial health to prosper if times get tough.

For example, Cabcharge no longer has a monopoly in taxi services with the rise of ride sharing services like Uber. The company is now operating in a more competitive environment thanks to the entry of a new disruptive technology and it is yet to adapt to this new landscape.

It is also of no surprise that six of the 12 companies that make up that list are either miners or mining services companies. These companies still face headwinds and investors are probably best to leave these alone for the time being.

The two stocks that make up the top of the list, Myer and Metcash, also face significant competitive challenges in the retail sector. Metcash is struggling to compete with its much larger rivals and faces further competition from new entrants into the market. Myer is also struggling against the rise of online shopping and the shift of consumers away from department store shopping.

Foolish takeaway

Short selling is not an exact science and short sellers can be wrong, but investors should make an effort to understand why a particular share is being targeted at any particular time. You can then decide if there is an opportunity if the short sellers are wrong or walk away and look for your next investment.

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Motley Fool contributor Christopher Georges 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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