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This ASX sector looks set to be a short-selling favourite in 2019

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is rallying this morning with just about every sector trading in the green – except for one group of ASX shares which could become the hot favourite among short-sellers.

I am referring to aged-care stocks as the Federal Government’s year-long Royal Commission into the industry kicks off today and Aged Care Minister Ken Wyatt shocked the industry yesterday by slapping new rules that’s likely to drive up costs for facility operators.

It’s no surprise to see the Japara Healthcare Ltd (ASX: JHC) share price tumble 3.3% to $1.18 and the Regis Healthcare Ltd (ASX: REG) share price fall 2.9% to $2.73 at the time of writing, although Estia Health Ltd (ASX: EHE) is bucking the trend with a 0.6% bounce.

However, all three stocks have shed over 20% or more in the past six months and they will see new lows in 2019 – so don’t be swayed by the valuation argument.

Royal Commission Blues

You only need to look at what happened to our blue-chip financial stocks like the AMP Limited (ASX: AMP) share price and Commonwealth Bank of Australia (ASX: CBA) share price in the wake of the Banking Royal Commission to see what I mean.

There’s just no reason to buy ASX shares under a governance and regulatory cloud until maybe after the conclusion of the Royal Commission as you cannot predict what or how many skeletons could fall out of the closet.

Looking at some of the allegations of elderly abuse that has emerged in the media, I am expecting some shocking stories to emerge as aged care industry leaders front the Royal Commission.

Short-sellers are already starting to move against the sector. Short-sellers profit from falling share prices by selling borrowed stock in the hope of buying it back later at a lower price.

Short-selling Paradise

Fund manager Monash Investors is one that is profiting from the sector weakness, according to the Australian Financial Review, as it has short-sold the three main ASX-listed aged-care providers.

The fund manager said “there’s no upside for these companies” and I couldn’t agree more.

Minister Wyatt’s decision to ban or limit the use of restrains and drugs on aged-care residents suffering dementia will leave facility managers scrambling to find new ways of managing such patients.

In my mind, that means higher costs as staffing levels will need to be increased and training will need to be provided given that few in the industry know how to care for dementia sufferers.

There’s plenty of room for short-sellers to target the stocks too as these stocks do not appear to be heavily short-sold.

The AFR said that Japara is the 75th most shorted stock on the ASX, while Estia is n 103rd spot and Regis is behind in the 128th position.

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Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia. 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.

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