The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) feels like it’s at an inflection point with investors struggling to find a new reason to buy the market. This is an environment that plays well to short-sellers, who are increasing their bearish bets against a handful of stocks they believe are poised to fall.
Short-sellers are traders who borrow stock to sell on market in the hope of buying it back at a lower price down the track to profit from the difference.
There are a variety of reasons why short-sellers would target a stock, but the end goal is always the same. Investors should be aware of what short-sellers are doing as the group can have an influence on the share price performance of your portfolio, particularly since short-sellers tend to be sophisticated investors.
It’s interesting that it isn’t stocks facing structural challenges like Myer Holdings Ltd (ASX: MYR) or those facing regulatory pressure like AMP Limited (ASX: AMP) that have seen the biggest increase increase in short-selling interest in the past month.
The stock that can claim the crown is waste management group Bingo Industries Ltd (ASX: BIN), as the percentage of its shares that are short-sold has jumped 3.2% to 9.4% over the month to 17 May, according to the latest ASIC data which is always a week behind.
The has been a great growth story and the long-term industry dynamics are positive but short-sellers are probably thinking that the stock has run too far too fast.
The share price of Bingo has rallied close to 60% over the past year when the S&P/ASX 200 is up 4.5%. The move by the Chinese government to restrict the import of recyclable materials could also cast a long shadow over the industry.
The stock with the second-biggest increase in short-selling interest is funeral services group InvoCare Limited (ASX: IVC).
The amount of its shares that have been short sold jumped 2.6% to 11% over the month.
The stock has been under pressure after management cut its earnings guidance at the start of May as it reinvests heavily in its business to improve returns.
While there’s strong upside to its share price if management is right, there are sceptics out there who think shareholders will have to suffer more pain before any gain.
Meanwhile, vet services and pet products retailer Greencross Limited (ASX: GXL) is the third hottest short-selling flavour of the month with the percentage of its shares out on loan jumping 2.5% points to 9.3%.
The company issued a profit warning this month as the number of pet owners taking their “fur babies” to Greencross’ vets fell.
Some see value in the stock after the bad news sent the stock tumbling, but the drop in vet visits is actually more sinister than some appreciate.
Greencross requires vet visitation to drive sales at its retail outlets (and not the other way around). Bored pet owners waiting for their animals to be treated would typically browse the shop and purchase items.
Declining vet visits will almost certainly mean a drop in retail sales and that is what the short-sellers are counting on.
Management is going to increase marketing spend to reverse the decline but I wonder if there’s a more sinister reason for the drop in vet visits.
I think investors may have to wait a while before this dog gets its day.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Greencross 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.