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4 shorted shares you might want to think twice about buying

Each day the corporate regulator ASIC releases a report showing what percentage of outstanding scrip a listed company has short sold. In other words the report shows how heavily speculators or professional hedge funds are betting on the share price of a company falling.

For example if a company has more than 10% of its shares shorted that would suggest some in the professional trading community expects the shares to fall soon enough.

However, short sellers can be spectacularly wrong and end up closing trades with large losses as we saw when overseas bidders made takeover offers for the likes of Aconex and Sirtex recently.

Still, let’s take a look at four companies that are relatively heavily shorted as at April 8 2019.

AfterPay Touch Group Ltd (ASX: APT) has 4.7% of its shares shorted. Betting against shares in this fast-growing buy-now-pay-later business over the short term is a dangerous game as it’s wildly popular and momentum is a powerful trend over the short term anyway. Shorters then will need nerves of steel and have to hope for a disappointing update or change in sentiment.

Bellamy’s Australia Ltd (ASX: BAL) has a significant 11.8% of its shares shorted presumably as it has quite a high valuation and a mixed track record as a public company. It’s also reportedly still waiting on a specific license to allow it to expand sales into the crucial China market. As such speculators are betting on a China slowdown.

Galaxy Resources Ltd (ASX: GXY) has a significant 17% of its shares shorted as speculators bet a fall in lithium prices and its significant debt load may bring the shares down. Galaxy reported that it made an adjusted EBITDA from operations of US$58 million in FY 2018 on revenue of US$153.9 million. Its shares are likely to remain volatile.

Invocare Limited (ASX: IVC) has 10% of its shares shorted as speculators bet it’s overvalued and faces rising competition from potentially cheaper operators.

However, after a capital raising following on from some aggressive acquisition and expansion plans investors have sent the stock to a 52-week high of $15.14.

This suggests almost every short seller betting against it is making a loss for now that could get worse. This goes to show how short sellers can potentially make bad mistakes like anyone else.

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Motley Fool contributor Tom Richardson owns shares of AFTERPAY T FPO.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Bellamy's Australia and 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.

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