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Why short-sellers are increasingly targeting these three ASX stocks

Forget Donald Trump, rising bond yields and record low wages growth. The biggest risk to equities is from government regulations, according to short-sellers who are increasingly betting on a decline in ASX stocks most exposed to this emerging issue.

Retail investors should pay attention to what short-sellers are doing as they tend to be more sophisticated in their evaluation of stocks compared to the average punter and are particularly useful in determining short-term sentiment towards a stock.

Short sellers borrow stock to sell on-market in the hope of buying it back later at a lower price in the not too distant future to profit from the difference.

While it’s worthwhile noting which stocks are the most heavily short-sold, it is more useful in my view to look at stocks where short-sellers have increased their bearish bets as it could allow you to predict trends in the market.

From that perspective, independent mortgage broker Mortgage Choice Limited (ASX: MOC) finds itself taking the dubious honour of being the hottest target of short-sellers, according to the latest data from the Australian Securities and Investments Commission (ASIC) which is always a week old.

The percentage of Mortgage Choice stock that is lent to short-sellers has increased by over 3 percentage points to 5.8% in the past fortnight.

This is probably because short-sellers are expecting the government to make changes to the way mortgage brokers are paid following damning revelations at the Banking Royal Commission.

These changes could threaten the business model and profitability of Mortgage Choice and investors are likely to sit on the sidelines given the uncertainty, which in turn will give short-sellers a clear runway to drive down the share price of the company.

The stock with the second biggest increase in short interest over the past two weeks is food and beverage franchisor Retail Food Group Limited (ASX: RFG) as a parliamentary inquiry into the franchise industry is about to kick off.

We have already started seeing media reports on how franchisees of Gloria Jeans and Michel’s Patisserie (two of the many brands under RFG’s umbrella) have been unfairly treated and this is driving short-interest in the stock.

The percentage of RFG’s shares that are short-sold have jumped by just under 3 percentage points to 10.9%. That’s a big amount of stock in the hands of these traders although it is still below the 17.5% mark of fellow franchisor Domino’s Pizza Enterprises Ltd. (ASX: DMP).

Domino’s was targeted by short-sellers earlier due to concerns that it will miss profit guidance given at the February reporting season and worries about the margin lending account of its chief executive.

I won’t be surprised to see a lot more of RFG’s stock fall into the hands of short-sellers in the near-term and would be avoiding this stock.

Number three on the list is Genworth Mortgage Insurance Australia (ASX: GMA) as short-positions against the stock rose 2.1% to 7.3%.

The stock has been under pressure since February when it announced changes to the way it accounted for revenue. The step-up in short-interest is likely due to growing expectations of falling residential property prices, which will compound Genworth’s earnings challenge.

Interestingly, short-interest in the big banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX:WBC), which are at the heart of the Royal Commission, have remained relatively steady.

It’s their regional peer Bank of Queensland Limited (ASX: BOQ) that’s the flavour of the fortnight as the stock saw the fourth highest increase in short-interest with the percentage of its stock short-sold climbing 1.9% to 5.9%.

On the flipside, there is one sector with a very bullish outlook. The experts at the Motley Fool believe this niche sector is poised to make a big impact on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in 2018 and beyond.

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Motley Fool contributor Brendon Lau owns shares of Westpac Banking. The Motley Fool Australia has recommended Domino's Pizza Enterprises 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 Scott Phillips.

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