Our market is struggling for direction in the last day of trade for the week as investors sit on the sidelines to see US President Donald Trump’s next move in the escalating trade war with China.
In this directionless market with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index holding at around breakeven for the week, it’s often useful to cast an eye on the stocks that short-sellers are targeting most.
According to the latest data from the Australian Securities and Investments Commission (ASIC), which is a week behind, the stocks that have seen the biggest increase in short-interest in the five trading days to July 9 are pharmaceutical products company Sigma Healthcare Ltd (ASX: SIG), poultry supplier Inghams Group Ltd (ASX: ING) and building materials supplier CSR Limited (ASX: CSR).
It’s often useful to keep an eye on what short-sellers are betting against because they tend to be more sophisticated than the average retail investor. Short-sellers borrow stock to sell on-market in the hope of buying it back at a lower price later to profit from the difference.
Sigma is the most targeted stock by short-sellers with the percentage of its shares on loan to short-sellers jumping 2.3 percentage points to 7.4% over the week to Monday. This is the largest increase of any stock on the ASX.
The rising bearish bets against Sigma are not surprising after the group lost its lucrative Chemist Warehouse contract to rival EBOS Group Ltd (ASX: EBO), which prompted Sigma to issue a profit warning.
In some respects, you could say Sigma is looking cheap following the near halving of its share price on the news, but I wouldn’t be hunting the stock until we see short-interest in the stock stabilising or decreasing.
Meanwhile, Inghams has long been a favourite of short-sellers since last month’s shock resignation of its then chief executive Mick McMahon.
Short-interest in the stock continues to increase with the amount of its shares in the hands of short-sellers jumping 1.4% on the week to a whopping 11.9%.
That’s a lot of stock on loan to the bears and the mauling doesn’t seem to be letting up as the company goes through a painful restructuring and consolidation to cut costs without a permanent captain at the helm (it has an interim CEO).
Short-sellers do not believe the cost savings program will yield any short-term results and I dare say I agree! I would be staying clear of the stock for now too.
Finally, short-sellers are also upping their bets against CSR as the company is also going through a painful restructure as investors flee the stock on worries of a slowing housing construction market.
The newly appointed chairman of CSR, John Gillam, is spearheading the turnaround program at the group with the stock suffering a 20% plunge since May.
Gillam is the former boss at Bunnings and helped the DIY chain expand successfully in Australia before its disastrous foray into the UK.
I am not sure if short-sellers are growing increasingly interested in CSR because of Gillam or fresh signs of a worse-than-expected fall in the local residential market, but either way, I wouldn’t buy CSR until I see light at the end of the tunnel.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.