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Why these 4 shares are being heavily shorted

On the share market some professional investors will short sell shares in companies based on their expectations that the share prices are likely to fall. For example investors may bet against a company on valuations grounds, or because they think it has dodgy accounts as we saw with Slater & Gordon Limited (ASX: SGH).

However, short sellers can also be spectacularly wrong in their guesses as to which way next for share prices, as we saw when the heavily shorted software business Aconex received a takeover bid from Oracle at a 47% premium to its then price.

So short sellers can be wrong or right, but it’s still worth knowing about what companies they’re betting particularly heavily against. Let’s take a look at four below. All stats correct as at December 4, 2018, according to ASIC.

Orocobre Limited (ASX: ORE) is a lithium miner with its main mining operations in Olaroz, Argentina. It currently has 13.85% of its shares shorted despite reporting a statutory net profit of US$1.9 million in FY 2018. It also boasts that on an “underlying” or adjusted basis it posted a profit of US$25.7 million. With 261.4 million shares on issue it has a market value of $1 billion based on a share price of $3.83. Short sellers may be betting against its valuation, although it also has a healthy net cash balance.

Syrah Resources Ltd (ASX: SYR) has 16.3% of its shares shorted as speculators bet the graphite miner with tenements in Mozambique won’t deliver on its claims that it will become profitable as one of the world’s leading graphite miners. It has a market value around $550 million, but according to its latest quarterly cashflow report it earned no revenues and produced an operating loss of US$21.3 million for the quarter ending September 30, 2018.

Metcash Limited (ASX: MTS) now has 13.3% of its shares shorted, with short interest rising since the IGA store supplier and hardware business reported a weaker-than-expected profit result for the half-year ending October 31, 2018. Metcash’s IGA stores are facing more competition as leading supermarket operators Woolworths (ASX: WOW) and Coles (ASX: COL) sacrifice margins in the pursuit of market share. This tough operating environment is probably encouraging Metcash’s short sellers.

Speedcast International Ltd (ASX: SDA) has 9.2% of its shares short sold as speculators bet the $804 million satellite services operator could be in for a fall. As at June 30, 2018 Speedcast had net debt of US$430 million, which is 7x underlying EBITDA of US$60.4 million. This amount of leverage is probably giving short sellers confidence.

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Returns as of 6th October 2020

Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLES GROUP. 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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