Is short selling a good investment strategy?

Short sellers may have had success with Blue Sky Alternative Investments Ltd (ASX:BLA) and Retail Food Group Limited (ASX:RFG), but how often are they right?

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Short sellers have been in the news a lot this year with high profile takedowns of both Blue Sky Alternative Investments Ltd (ASX: BLA) and Retail Food Group Limited (ASX: RFG).

These two shares have fallen a massive 68% and 85% since this time last year.

However, not all short seller targets have been as successful. Short interest in the company behind the Sukin skin care brand, BWX Ltd (ASX: BWX), had been building up over the last couple of months. So much so, earlier this week almost 11% of its shares were in the hands of short sellers.

The surprise takeover approach on Monday and subsequent 36% rise in its share price won’t have gone down well with these short sellers.

But what about the rest of the targets? To find out how the strategy was working I thought I would look at the most shorted shares from 12 months ago to see how they have performed.

The Orocobre Limited (ASX: ORE) share price is up 68% since this time last year. The electric vehicle boom has certainly hit short sellers hard.

The Western Areas Ltd (ASX: WSA) share price has surged 58% higher over the last 12 months. Like Orocobre, increased demand for nickel in electric vehicle batteries has worked against short sellers.

The Syrah Resources Ltd (ASX: SYR) share price has risen almost 34% in 12 months. The graphite miner is currently the most shorted share on the Australian share market. Short sellers appear to be unwilling to let this one go.

The Vocus Group Ltd (ASX: VOC) share price has fallen 21% since this time last year. The telco sector certainly has been a good place to be short.

The Aconex Ltd (ASX: ACX) share price is no longer on the ASX boards after being taken over by Oracle. But 12 months ago its shares were priced at $4.17 and the takeover price was 87% higher at $7.80.

The Myer Holdings Ltd (ASX: MYR) share price has more than halved in value since this time last year due to the department store operator’s turnaround strategy showing little by way of improvement.

The Mayne Pharma Group Ltd (ASX: MYX) share price has dropped 35% over the last 12 months as it suffers from price headwinds in the U.S. generic drugs market.

The Independence Group NL (ASX: IGO) share price has jumped 41% in 12 months thanks to improvements in the gold and nickel prices.

The Bellamy’s Australia Ltd (ASX: BAL) share price is up a massive 190% since this time last year in what can only be described as a major fail by short sellers.

The Domino’s Pizza Enterprises Ltd. (ASX: DMP) share price is down 29% over the last 12 months after falling short of its guidance for both its full-year FY 2017 results and its half-year FY 2018 results.

Foolish takeaway

Overall, it turns out that if you had bought the ten most shorted shares this time last year, you’d be sitting on a market-beating 12-month return of over 34% excluding dividends. As a comparison, the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up 4.3% during the period.

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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 BWX Limited and Vocus Communications Limited. 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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