If a share is being short sold by professional traders then that means they expect it to fall in price over the short or medium term. Short sellers are often professional investors acting on the advice of researchers who only specialise in identifying shares to ‘short’ in research reports that they then sell on to professional money managers.
Therefore if a share is heavily sold short then it’s worth considering why, as it might be a warning sign for investors.
Of course short sellers can be totally wrong as for every seller there’s a buyer in a market and some short sellers also have a reputation for dodgy practices in deliberately spreading misinformation irrespective of a company’s fundamentals.
Still, let’s take a look at four companies that currently have more than 10% of their shares on issue short sold. All data correct as at November 26 according to ASIC.
InvoCare Limited (ASX: IVC) is the funeral parlour operator and aggregator that on October 8 2018 downgraded profit guidance on the back of weaker-than-expected funeral volumes. It is also investing reasonably heavily in refurbishing many of its funeral parlours to create more of a ‘life celebration’ feel than traditional funeral. It has 12.08% of its shares shorted and traders might be betting against it on valuation grounds and because of concerns over the potential for increased cut-price competition.
Metcash Limited (ASX: MTS) has 12.54% of its shares on issue shorted as traders bet that the IGA supplier and store operator may find competition from the likes of Woolworths Group Ltd (ASX: WOW) and Coles Group Limited (ASX: COL) continues to hurt its market share. Metcash is in a tough position as margins across the food and groceries sector are under pressure.
NextDc Ltd (ASX: NXT) has 11.1% of its shares on issue shorted as investors bet the data centre operator and developer is potentially overvalued. NextDC has been investing heavily in constructing new data centres due to strong demand from enterprise customers, but already has a lot of growth baked into tis $2.2 billion valuation.
Myer Holdings Ltd (ASX: MYR) has 11.3% of its shares outstanding shorted as its problems with falling profits and a lack of foot traffic at its stores are common knowledge. It also has an activist investor in Solomon Lew attempting to overthrow the current board in complaining that they are incompetent. This challenged business is one that has proved a success for short sellers over several years.
Motley Fool contributor Yulia Mosaleva owns shares of InvoCare Limited. The Motley Fool Australia has recommended InvoCare 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.