Does short selling actually work?

At the start of each week I like to look at which shares short sellers are targeting. One question I get asked a lot is whether or not short sellers get it right.

In order to see how good they are at picking out a loser, I thought I would go back one year and see how the top ten most shorted shares have performed.

Here are the ten most shorted ASX shares from a year ago:

  • Aconex Ltd (ASX: ACX) was the most shorted ASX share at the time. Although in the long-term short sellers got it wrong, in the short-term it was a big winner for them. Over the following two weeks its shares would go on to sink almost 50% lower.
  • The Myer Holdings Ltd (ASX: MYR) share price has fallen 50% since this time last year, making it a big win for short sellers.
  • The Western Areas Ltd (ASX: WSA) share price fell 32% over the next five months as nickel prices softened, but is now 23% higher than it was a year ago thanks to an improved outlook.
  • The Quintis Ltd (ASX: QIN) share price has lost 82% of its value since this time last year. It was around this time last year that the sandalwood plantation manager was accused of operating like a Ponzi-scheme.
  • The Syrah Resources Ltd (ASX: SYR) share price would go on to fall 34% over the next couple of months, before recovering and ultimately racing to an-all-time high earlier this month.
  • The Nine Entertainment Co Holdings Ltd (ASX: NEC) share price has risen 37% over the last 12 months, making it a big loser for short sellers.
  • The Metcash Limited (ASX: MTS) share price is 39% higher since this time last year, much to the dismay of short sellers.
  • The Vocus Communications Limited (ASX: VOC) share price is down 25% over the last 12 months. At one stage its shares were down as much as 48%.
  • The Worleyparsons Limited (ASX: WOR) share price has stormed 41% higher since this time last year. There was, however, a sharp 25% drop in February that short sellers could have used to exit positions.
  • The News Corp (ASX: NWS) share price has rallied 31% in the last 12 months, making it another loser for short sellers.

Foolish Takeaway

Seven out of the ten shares sank notably lower at some stage in the months that followed.

As a result, I believe this demonstrates why investors ought to take high levels of short interest seriously when considering an investment.

With that in mind, here are three high-flying growth shares with low levels of short interest that I would buy today.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended ACONEX FPO and Vocus Communications 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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