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Why these are the 5 most shorted ASX shares

It is sometimes important to acknowledge which shares investors and institutions are betting on falling the most. Anything over 10% is a significant amount and suggests that there might be a fundamental reason why the stock is being targeted.

Let’s consider why the market is betting against these 5 ASX shares.

Syrah Resources Ltd (ASX: SYR)

Syrah Resources currently has 17.55% of its stock held in a short position. The graphite miner continues to battle lower prices and higher-than-expected operating costs. In its 1Q19 update, Syrah cited graphite production of 45kt with average prices lower than guidance. It is very difficult to approach a stock with a share price that’s plunging. I would avoid Syrah Resources for now.

Inghams Group Ltd (ASX: ING)

Inghams Group currently has 17.22% of shares shorted. While poultry is an increasingly popular form of protein, being a poultry farmer doesn’t appear to be an increasingly profitable business. Ingham’s has experienced some difficulties in growing margins with rising feed and energy costs. The company posted a 5.3% fall in net profit after tax following its HY19 result. I am a little confused as to why the company is so heavily shorted, however. I believe Inghams has good cash flow and is on track to improve its operational capacity.

Galaxy Resources Limited (ASX: GXY)

Galaxy currently has 16.04% of its stock shorted. Lithium bulls experienced a horrific 2018 with numerous lithium downgrades and fears of oversupply. I believe the lithium sector is still trying to find a bottom, hence the high percentage of shorters. The lithium spot price also continues its downwards trend which may eventually put pressure on long term contract prices when they are due for renewal. I am a big fan of the lithium story and believe that Galaxy is near a point of good risk/reward.

JB Hi-Fi Limited (ASX: JBH)

JB Hi-Fi currently has 15.38% of stock shorted. JB Hi-Fi is a tough one to both long and short in my opinion. The bear case is that the electronic retailing sector is becoming increasingly competitive with new and existing entrants such as Ltd (ASX: KGN) and international competitors such as Amazon. Coupled with macro factors such as slowing wage growth and poor retail sales growth, investors might believe there is a water-tight short case. With that being said, JB Hi-Fi has remained incredibly resilient in the midst of retail bears. In the company’s HY19 results, it delivered total sales growth of 4.2%, net profit after tax growth of 5.5% and raised dividends by 5.8%. I’m not a fan of investing in retail, but I do commend JB Hi-Fi for its performance.

NextDC Ltd (ASX: NXT)

NextDC currently has 12.80% of stock shorted. This is on the basis that investors believe that the data centre operator’s stock is greatly over-valued. NextDC currently trades on a P/E ratio of roughly 300. In the company’s recent HY19 results, it only posted revenue growth of 17% and a net loss of $3.1 million (compared to $8.4 million on the prior corresponding period). While there does appear to be a mismatch in NextDC’s valuation and growth portfolio, there is no doubt that data centres, connectivity services and infrastructure management software is the way of the future.

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Motley Fool contributor Kerry Sun 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.

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