‘Short selling’ professional or amateur investors may take physical short positions (by borrowing the stock to sell on-market) or synthetic positions (via contracts for difference – cash settled futures) in stocks in a way to bet that they will fall in value.
Every day the corporate regulator ASIC publishes a list of what percentage of outstanding scrip in a company has been borrowed from a prime broker to be short sold on market. If a company has more than 10% of its scrip physically short sold that means some traders are betting heavily on its price falling.
So while these traders can often be spectacularly wrong, it’s worth considering what stocks they are betting against.
JB Hi-Fi Limited (ASX: JBH) has 15.3% of its shares shorted to suggest hedge funds are betting online discounters like Amazon.com may soon take market share and hurt its margins. I’m not so sure on this one and expect JB Hi-Fi could still beat the market from here.
Galaxy Resources Limited (ASX: GXY) has 14.13% of its shares shorted as investors bet its balance sheet and capex commitments may hurt the lithium miner. The other factor fuelling the short interest is the unpredictability of lithium prices that are not exchange traded and have potential to swing wildly given this is a relatively new market.
Metcash Limited (ASX: MTS) is the IGA store supplier and operator that has 11% of its scrip shorted as traders also bet that its margins and market share will remain under pressure due to competition from overseas discounters and the increased competitiveness of Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW).
BWX Limited (ASX: BWX) has 10.2% of its shares shorted and the Skin natural beauty products manufacturer recently issued another downgrade to its guidance for FY 2019. I must admit I’d also be hot footing it for the exits if I owned this stock.
NextDC Ltd (ASX: NXT) is the data centre operator that is slightly different to the rest, as traders are primarily betting against it on valuation grounds. It trades on a huge multiple of trailing and expected profits with significant capex commitments. However, I’m not familiar enough with NextDC to have any opinion as to which way its price might head.
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The Motley Fool Australia owns shares of and has recommended BWX 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.