Our market has lost steam through September and the weakness may still have several more weeks to run. This is a good time to look at what shares short-sellers are increasingly targeting over the past month.
Short-sellers are generally more knowledgeable than the typical retail investor and they aim to make a profit by borrowing stock to sell on the market with the hope of buying it back at a lower price later.
These bearish traders may have booked a decent profit as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index has fallen 3% since September.
Short sellers often stake their reputation and capital on their ability to identify underperforming stocks, so it pays to keep an eye on what they are targeting.
The stock that has seen the biggest increase in short-interest is satellite services group Speedcast International Ltd (ASX: SDA).
It looks like the stock is paying off for short-sellers as its share price has fallen another 4% in morning trade to $3.88 – taking its loss since it announced its interim results and US$135 million acquisition of Globecomm in late August to 42%.
The number of shares in the hands of short-sellers jumped by a whopping 4.9 percentage points to 6.4% since the end of August to September 26 (the latest ASIC data which is always a week old).
The stock with the second highest increase in short-interest is datacentre operator Nextdc Ltd (ASX: NXT) with the percentage of its shares being short-sold jumping by just under 4.9 percentage points to 8.5%.
The market is questioning if NextDC deserves its high price-earnings (P/E) multiple as its full-year profit results showed a slowdown in revenue growth in the second half of FY18 compared to the first half.
A change in the way it accounts for profits is also making things more challenging for investors with consensus data from Reuters putting the stock on an FY20 P/E of nearly 400 times.
Meanwhile, rare earth miner Lynas Corporation Ltd (ASX: LYC) is putting a smile on short-sellers faces too. Short interest in the stock has jumped 3.6 percentage points to 5.6% since end August as the stock crashed 23% over the same period.
Investors are bracing for a bad outcome as the new Malaysian government reviews its arrangements with the miner.
On the flipside, things might be starting to look up for one of the most shorted stocks on our market – Syrah Resources Ltd (ASX: SYR).
Short-sellers cut their bearish bets on the graphite miner by the most in September with short-interest falling 4 percentage points to 16.5%.
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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.