Professional short sellers and hedge funds borrow shares in ASX companies usually from investment banks acting as prime brokers. The short sellers aim to sell the stock on market and then buy it back at a cheaper price to return to the prime broker. It’s a high-stakes game however as shares that are heavily shorted can quickly spike higher on good news for a particular company as all the shorts simultaneously rush to buy back securities to close out a position, either at a profit or potentially large loss. Short sellers will have a high conviction then that shares in…
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Professional short sellers and hedge funds borrow shares in ASX companies usually from investment banks acting as prime brokers. The short sellers aim to sell the stock on market and then buy it back at a cheaper price to return to the prime broker.
It’s a high-stakes game however as shares that are heavily shorted can quickly spike higher on good news for a particular company as all the shorts simultaneously rush to buy back securities to close out a position, either at a profit or potentially large loss.
Short sellers will have a high conviction then that shares in a particular company are likely to fall, which means investors should carefully consider the risks around owning such shares.
Below is a list of 10 of the most heavily shorted shares on the ASX as at 10 March 2016.
- Cabcharge Australia Limited (ASX: CAB) 11.32% of its shares are shorted due to the increasing popularity of ride-sharing service Uber.
- Carsales.Com Ltd (ASX: CAR) 6.21% of its stock is shorted as some bet that its future profit growth rate won’t match the company’s high valuation.
- Corporate Travel Management Ltd (ASX: CTD) 6.09% of its shares are shorted as some bet against its acquisitive growth strategy. However, its recent interim profit result showed strong organic growth and with the stock near a record high, short sellers must be worried.
- Flight Centre Travel Group Ltd (ASX: FLT) 13.63% of its shares are shorted as short sellers bet against its bricks-and-mortar business model. Given the impressive revenue growth and overseas strength, betting against Flight Centre looks risky.
- Greencross Limited (ASX: GXL) 6.51% of shares of the veterinary practitioner and pet store retailer are shorted. The business also employs an acquisitive growth strategy and is the subject of takeover interest from private equity operators.
- IOOF Holdings Limited (ASX: IFL) 5.7% of the fund manager and administrator’s shares are shorted. It suffered regulatory issues in 2015, although short sellers are likely expecting a fall in markets to take its share price down.
- Metcash Limited (ASX: MTS) 17.6% of the shares of the IGA supermarket store operator are shorted on the belief that falling food and grocery margins across the supermarkets sector will see the business continue to struggle.
- Myer Holdings Ltd (ASX: MYR) 16.6% of the department store operator’s stock is shorted as the business faces up to strong competition and years of underinvestment that have sent its department stores out of fashion.
- Oil Search Limited (ASX: OSH) 7% of the scrip of the PNG-based LNG giant is currently held short likely because sellers are betting on further falls in energy prices.
- Retail Food Group Limited (ASX: RFG) 8.2% of the franchisor’s shares are shorted, although the stock is up around 23% just in March in what is a good example of a ‘short squeeze’ where short sellers are forced to close positions due to unexpectedly good news supporting a company’s outlook.
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Motley Fool contributor Tom Richardson owns shares of Corporate Travel Management Limited, Greencross Limited, and Retail Food Group Limited.
You can find Tom on Twitter @tommyr345
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 owns shares of Retail Food Group Limited. 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.