Time to sell these 10 heavily shorted shares?

Professional investors, hedge funds and others can commonly borrow stock from a prime broker (usually part of a large investment bank) to sell on market in the hope of buying it back later at a cheaper price and pocketing the difference as a profit.

Of course there are fees involved to borrow shares and shorting is a high-stakes game as unpopular companies can improve performance or receive takeover offers for example. Just ask professionals who were shorting takeover targets Sirtex Medical Limited (ASX: SRX) and Aconex Ltd (ASX: ACX) recently.

As such short sellers tend to have a high conviction that certain stocks are set to fall, so it may be worth paying attention to those that are the favourites of short sellers. All short sold stats below are accurate as at 19 March according to ASIC.

Afterpay Touch Group Ltd (ASX: AFT) is the buy now, pay later, consumer or retailer credit extension type business that has rocketed in value due to its wild popularity with small to large retailers across Australia. Nearly 7% of the stock has been shorted recently, probably on concerns over its valuation, the potential for increased regulation, or extended credit risks.

BWX Limited (ASX: BWX) is the Sukin natural skincare brand that has made a couple of large acquisitions in the U.S. natural beauty products market over the last year. Sales growth of its Sukin products was moderate over the half year to December 31 2017 and I recently sold nearly half my holding in the business for $5.45 per share. Given the valuation and uncertain outlook I’m not surprised to see 8.7% of this business short sold.

Domino’s Pizza Enterprises Ltd. (ASX: DMP) has a whopping 17.3% of its issued equity sold short. Recently its own CEO has been talking up the company’s prospects while selling down his own holding and having the company buy back shares on market. Domino’s also has growth problems in Japan, while its best growth days in Australia may be behind it as the market is increasingly saturated. The valuation is still high and I’m not surprised traders are betting against it.

Flight Centre Travel Group Ltd (ASX: FLT) has 10% of its shares sold short, although it must have caused shorters a lot of pain over the years. It’s been rising steadily for the last 15 years and anyone betting against this business needs to be nimble. The price of this stock can swing with market sentiment and may be a little stretched for now.

Galaxy Resources Limited (ASX: GXY) is the lithium miner being bet against as some professionals expect opaque lithium pricing may not hold, especially if the market becomes oversupplied. Galaxy has 14.3% of its shares shorted and its stock is likely to remain volatile on this basis alone.

Healthscope Ltd (ASX: HSO) has long been targeted by short sellers including the soon-to-list L1 Capital as it’s struggled to deliver the earnings growth expected from a stock previously trading on a high multiple of profits. Its been on a steady downward trend since it listed and I’m not surprised to see shorters still betting heavily on the share price going lower, with 13.5% of shares shorted.

JB Hi Fi Limited (ASX: JBH) is the electronics retailer with 16% of its outstanding scrip short sold. That’s high and the main reason is the belief that in Australia is going to take market share from JB Hi-Fi at the same time as forcing its margins lower. There’s no doubt that would be a terrible combo for JB Hi-Fi, but only if Amazon hits its straps in Australia. JB Hi Fi has its own online plans and a dominant market position, so I’m not betting against it performing well over the medium term.

Mayne Pharma Group Ltd (ASX: MYX) has 10.9% of its shares sold short as it continues to report pricing pressures on its portfolio of drugs sold in its core U.S. market. President Trump recently claimed that some pharmaceutical companies “were getting away with murder” in terms of U.S. drugs pricing and it seems there could be more tough times ahead for Mayne investors.

Retail Food Group Limited (ASX: RFG) has 10.6% of its shares short sold and multiple problems including falling profits and a potentially unmanageable debt pile. Management has no credibility and the franchising business model is in doubt. It’s been a painful fall and it looks like it’s time to sell RFG.

Vocus Group Ltd (ASX: VOC) (11.4%) is another overly-indebted business with an atrocious recent track record. It currently has no CEO and a $1.1 billion debt pile it is hoping to lower via a sale of its New Zealand internet business. Even if it pulls this off the outstanding debt pile could hurt a business that is being dragged down ever since it took on the M2 Group’s collection of businesses. It looks a sell and I’ve steadily sold my holding over the past 12 months.

Many of the businesses above have got more than 1 in 10 of their shares on issue sold short which suggests traders may be reaching the limits of how much stock they can get their hands on to borrow. In other words if there were more available the percentages would be even higher.

Of course just because a stock is sold short doesn’t mean it’s a bad investment, sometimes it might be a good one, but I’m not a buyer of any of the above businesses and double-digit percentages sold short should serve as a warning sign.

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Motley Fool contributor Tom Richardson owns shares of BWX Limited and Vocus Communications Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended BWX Limited, Flight Centre Travel Group Limited, and Vocus Communications Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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 Scott Phillips.

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