The Motley Fool

ASX stocks that could outperform as short-sellers capitulate

It often pays to see what short-sellers are up to as the level of bearish bets can often have a significant short-term bearing on the performance of ASX stocks.

While investors often pay attention to the most shorted stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, they often neglect to look at stocks where short-sellers are beating a hasty retreat.

Short-selling is the game of selling a borrowed stock in the hope of buying it back at a lower price later to profit from the difference. Short-sellers tend to be more sophisticated compared to the everyday investor – although they don’t always get their bearish calls right.

In that respect, I suspect looking at companies that have recorded a big decline in the number of shares out on loan to short-sellers (called short-interest) could prove to be a more accurate sign of when a stock will recover.

Biggest drop in short-interest

The stock that recorded the biggest drop in short-interest this month is building materials and services group Wagners Holding Company Ltd (ASX: WGN).

The amount of WGN shares shorted fell 169 basis points to 1.62% as at July 15 (ASIC data is always one week behind).

Shareholders will be hoping that the loss of interest of short-sellers will mark a turning point for the stock, which was trading at over $4 a year ago and is currently fetching $1.85.

Short-sellers losing their appetite

Short-sellers are also rushing for the exits in Retail Food Group Limited (ASX: RFG). Short-interest in the embattled food franchisor, which owns brands like Gloria Jean’s Coffees, Brumby’s Bakeries and Donut King, fell 81 basis points since the start of July to just 0.43% as of last Monday.

Chatter about of possible white knight riding to the rescue for the scandal-ridden group has undoubtedly contributed to the short-selling exodus.

The Sydney Morning Herald reported that Soliton Capital is considering injecting $100 million or more to help Retail Food Group repay debt due in the third quarter of this year.

I would be reluctant to join the bulls in buying the stock but those with a higher tolerance for risk may be willing to make a punt.

Steeling for a recovery

The third notable stock gaining ground against short-sellers is the BlueScope Steel Limited (ASX: BSL) share price.

Short-interest in the steel products maker fell 65 basis points this month to 0.41% as an improving outlook for US steel prices have prompted bearish traders to take profit and close positions.

While the Bluescope share price is still down by more than 30% over the past year, it has enjoyed a significant bounce in the last month or so.

I think the stock looks cheap and I believe it will continue to outperform over the short to medium-term.

One ASX Stock For An Estimated $US22 Billion Marijuana Market

A little-known ASX company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

And make no mistake – it is coming. To the tune of an estimated $US22 billion.

Cannabis legalisation is sweeping over North America, and full legalisation arrived in Canada in October 2018.

Here's the best part: we think there's one ASX stock that's uniquely positioned to profit immensely from this explosive new industry... taking savvy investors along for what could be one heck of a ride.

AND, this is the first time The Motley Fool Australia has EVER put a BUY recommendation on a marijuana stock.

Simply click below to learn more on how you can profit from the coming cannabis boom.

Click here to find out more


Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited. Connect with him on Twitter @brenlau.

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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.