Short-sellers have been upping their bearish bets on a handful of stocks over the past week – a sign that these stocks could come under increasing pressure in the near-term.
It’s often useful to watch what short-sellers are doing to get a sense of the near-term price direction of certain shares as these traders are usually more sophisticated than the average retail investor.
Short-selling involves borrowing a stock to sell on market with the aim of buying it back later at a lower price.
There’s little evidence that short-selling is correlated to the longer-term fundamentals of a stock but this group of traders can, and often do, influence share prices over the short-term.
This is why investors in datacentre operator Nextdc Ltd (ASX: NXT) should be on alert as the stock is the “soup du-jour” on short-sellers’ menus! It’s the most targeting stock as the amount of its shares short-sold increased by 3.4 percentage points to 13.8% of total shares on issue over the week to March 8 (the latest data from ASIC is always a week old). That’s a big amount.
This is the biggest increase of any stock on the ASX and could partly explain why NEXTDC’s share price has come under pressure recently.
There have been ongoing concerns that NEXTDC will struggle to fully rent out capacity at its new datacentres due to increasing competition.
Meanwhile, the second most target stock is debt ledger purchaser Credit Corp Group Limited (ASX: CCP).
The increase in shares being short-sold (called short-interest) jumped by nearly 3.4 percentage points to 9.2% and short-sellers may be upping their bearish bets on the stock on the belief that it’s overpriced after CCP’s share price surged nearly 20% since the start of the year.
Our slowing economy certainly bodes well for Credit Corp’s business but some experts worry that the stock is overvalued given the fiercely competitive landscape.
Nickel miner Western Areas Ltd (ASX: WSA) is another hot shot-selling favourite in third spot. Short-interest in the stock jumped 2.7 percentage points to 8% over the week and its poorly received profit results last month isn’t helping.
The WSA share price has fallen around 7% over the past month.
Stocks with the biggest drop in short-sellers
On the flipside, short-sellers appear to be locking in profits or throwing in the towel for some of the most shorted stocks on the ASX.
This may indicate that the market thinks that the worst is behind these companies.
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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.