Should you avoid the ASX’s most shorted shares?

Every day, the Australian Securities and Investment Commission (ASIC) publishes its ‘Daily Short Position’ report, although data is always four days in arrears. It is a record of how many shares in a given company are held for short-sale on that particular day.

Short-selling is the practice of borrowing shares to sell them, with the hopes of the price falling and being able to buy them back at a lower price. It is usually used only by expert traders and brokerage houses and, as a result, it can be risky to buy shares that the experts are betting against.

Here are some of the most heavily shorted shares on the ASX, as of 5 April, 2016:

Company Percentage of shares on issue held for short sale
Alumina Limited (ASX: AWC) 9.5%
AWE Limited (ASX: AWE) 9.9%
Bendigo and Adelaide Bank Ltd (ASX: BEN) 6.6%
Cabcharge Australia Limited (ASX: CAB) 9.6%
Flight Centre Travel Group Ltd (ASX: FLT) 11.6%
JB Hi-Fi Limited (ASX: JBH) 9.8%
Metcash Limited (ASX: MTS) 16.5%
Monadelphous Group Limited  (ASX: MND) 10.9%
Myer Holdings Ltd (ASX: MYR) 13.8%
Orica Ltd (ASX: ORI) 12.1%
Primary Health Care Limited (ASX: PRY) 13%
Retail Food Group Limited (ASX: RFG) 7%
SEEK Limited (ASX: SEK) 7.5%
Worleyparsons Limited (ASX: WOR) 14.1%

Notably, virtually all of the shares listed above are those in industries under stress or perceived to be at risk. Commodity markets (AWE, Alumina, Monadelphous), consumer spending (JB HiFi, Flight Centre, Retail Food Group),  companies with a poor competitive position (Metcash), those facing questions over regulation or performance (Primary Health), and companies perceived to be at risk of replacement by new technologies (SEEK) are some of the targets.

Surprisingly, some other companies that have been hit by market pessimism recently, like 1-Page Ltd (ASX: 1PG), Commonwealth Bank of Australia (ASX: CBA), Coca-Cola Amatil Ltd (ASX: CCL), and FlexiGroup Limited (ASX: FXL), have very low levels of short interest.

Foolish takeaway

Short selling is a risky game, and the simplest way to explain higher levels of short interest might be to say that sellers have identified either a vulnerability, or a potential catalyst for further falls. This is not to say that the targeted business is a bad investment per se, but investors looking at buying these stocks should be aware of the potential for exaggerated price falls and make their purchases accordingly.

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Motley Fool contributor Sean O'Neill owns shares of Coca-Cola Amatil Limited, Flight Centre Travel Group Limited, and Retail Food Group Limited. 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.

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