Now and then it’s worth taking a look at what shares hedge funds or professional investors are betting heavily on falling over the short term of say 6 to 12 months as it may give us some insights as to companies facing problems.
Short sellers borrow stock off prime brokers to sell on market and hopefully buy back later at a lower price to turn a profit on the difference less the fees owed to the prime brokers.
Generally if a business has more than 10% of its outstanding scrip shorted it’s fair to say it’s being relatively heavily bet against and it’s worth considering why some professionals are betting against it.
However, short sellers can be embarrassingly wrong as we recently saw when the heavily shorted Bellamy’s Australia Ltd (ASX: BAL) jumped 44% in a day on the back of a takeover bid.
So with all this in mind let’s take a look at five businesses being bet against. All stats accurate as at October 3, 2019 according to ASIC.
AMP Limited (ASX: AMP) has 6.2% of its scrip shorted as the struggling financial services giant attempts to execute a ‘turnaround strategy’ that includes asset sales, redundancies and a major corporate makeover. It was struggling operationally prior to the Royal Commission and recently scrapped its dividend completely in a corporate move that usually sees plenty of shareholders sell.
JB Hi-Fi Limited (ASX: JBH) has 11.5% of its scrip shorted despite it hitting a record high of $35.43 per share yesterday to mean every single short is losing their bets. In fact JB Hi-Fi shares are up 45% over the past year and 144% over the past 5 years to make the short bets even more curious. In additional to capital losses shorts will also be on the hook for the substantial dividend payments owed. Ouch.
Metcash Limited (ASX: MTS) is the wholesale IGA supermarkets supplier and Mitre10 home hardware store operator that has 9% of its scrip shorted. Traders are probably betting rising competition will put the squeeze on market share, sales, and profit margins for its core IGA business in a triple-whammy type effect.
NextDc Ltd (ASX: NXT) is a market darling for some investors that has more than tripled over the past 5 years as the data centre builder and operator benefits from the exponentially-growing demand for its online data storage capacity. However, it also has a lot of debt and minimal profits relative to its valuation as it invests heavily for the future. It has a high 13.2% of its scrip shorted.
Galaxy Resources Limited (ASX: GXY) is the lithium miner with mining tenements in WA, Argentina and Canada. The stock is down 63% over the past year and hit a 52-week low today as short interest rises to 16.9%. Its problem, inter alia, is that lithium prices have been falling as more supply comes onto the market and global growth slows.
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You can find Tom on Twitter @tommyr345
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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