Short sellers borrow shares in a company in order to sell them on market. Because they will have to buy back the shares in order to return them, short sellers are therefore betting that the share price will go down. Academic studies have shown that short sellers are good for the economy, and help spot fraud, but the key question for investors is whether they should avoid shorted companies, or bet against the shorts by buying shares.
Aconex Ltd (ASX: ACX) had 13.5% of its shares sold short on the 22nd of May, 2017, with 26.8 million shares sold short. That's around 29 times the daily average volume of shares traded during May. That means if the short thesis is disproved, there could be a scramble to cover short positions, and we could see a short squeeze.
The most likely reason that short sellers are targeting Aconex is that it is priced for strong growth, the co-founders (including the CEO) and another board member have been sellers of shares and the company's growth disappointed prior to the first half results, subsequent to the large acquisition of Conject Holdings. Short sellers may be taking the view that organic growth is not sustainable at the levels the company says it can achieve, and that the acquisition may not be as lucrative as first thought.
However, it does not seem immediately obvious to me why Aconex is an attractive target to short sell. Certainly, Aconex seems like a more attractive (long) investment than Domino's Pizza Enterprises (ASX: DMP) which is also a target of short sellers. Whereas Domino's has hundreds of millions of dollars of debt, Aconex has zero debt and a cash hoard of about $40 million.
For this reason, I would be somewhat surprised if the decision to short the stock pays off, since the company could probably just buy back its own stock if it wanted. However, the fact that so many people are willing to short sell a company with plenty of cash makes me thing there might be something negative I don't know about — if you do know, please get in touch!
However, one thing I do know is that Aconex has disappointed shareholders in the recent past. Like Aconex, one of our 'future blue chips' is a fast growing company with plenty of cash. But the company I'm thinking of has a longer listed history than Aconex, and it's hard to imagine it has disappointed many shareholders.
