5 heavily shorted ASX shares you might want to avoid

Hedge funds and professional investors will commonly borrow shares to sell on market in the hope of buying them back in the future at a cheaper price. The price difference they can pocket in profits, with the prime brokerage arms of investment banks commonly lending the securities to the hedge funds in exchange for fees.

Short selling is a risky strategy though as heavily shorted shares can often spike quickly on good news, which creates a rush among short sellers to close out positions by buying back the shares all at the same time.

Short sellers then will have a high conviction that a share is destined to fall. It’s therefore worth knowing what companies in particular are attracting the interest of the shorts. Below are five shares with much higher short interest than average.

Bank of Queensland Limited (ASX: BOQ) has 5.03% of its stock shorted as investors bet it will struggle to grow given the regulatory and competitive headwinds it faces.

Bellamy’s Australia Ltd (ASX: BAL) has 8.07% of its shares shorted as investors bet it won’t be able to deliver the earnings growth required to justify its high valuation. The baby formula business also faces regulatory headwinds as the Chinese government looks to levy higher taxes on certain foodstuffs imported online.

Bendigo and Adelaide Bank Limited Ltd (ASX: BEN) has 6.38% of its shares shorted as the regional banks face wholesale funding pressures and competition from their larger rivals.

Collection House Limited (ASX: CLH) has 4.03% of its shares shorted probably because investors suspect the debt collection specialist has another profit downgrade in store for investors. The company recently revised its full year profit forecast downward blaming rising costs in the debt markets it operates in.

Domino’s Pizza Enterprises Ltd (ASX: DMP) has 3.48% of its shares shorted as investors bet the stock is overvalued as it sells for around 60x analysts’ estimates for FY2016’s earnings. This looks expensive, and Domino’s international expansion will need to deliver to justify this valuation.

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Motley Fool contributor Tom Richardson owns shares of Bellamy's Australia.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Bellamy's Australia. 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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