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Broker warns Afterpay and these ASX stocks are caught in an overcrowded trade

There’s a risk that the Afterpay Ltd (ASX: APT) share price could be trampled in a stampede next month after Credit Suisse warned the tech darling was caught in an overcrowded trade.

The buy now, pay later (BNPL) company is but one of the 10 S&P/ASX 200 Index (Index:^AXJO) stocks identified by the broker that’s stuck in the “crowded long” trade.

To be clear, this doesn’t mean these stocks are on the cusp of tumbling. But it does mean they are especially vulnerable if they issued bad news during next month’s profit reporting season.

Overcrowded long trade

So, what’s an overcrowded long trade exactly? That’s when investors have become too excited and too many have jumped to buy the stock.

Credit Suisse screened large cap stocks on two key criteria to make up the list.

“We have aggregated the net broker trading volumes to produce net flows for the last three months across the leading Australian institutional brokers,” said the broker.

“In addition, short interest as recorded from ASIC is overlaid.”

Short-selling data

ASIC, or the Australian Securities and Investments Commission, puts out a daily report showing the percentage of shares in each ASX company that’s been short-sold.

Short-selling is when a trader borrows stock to sell on-market in the hope of buying it back at a lower price later. Such trades allow a trader to profit from a falling share price.

To make it on Credit Suisse’s “crowded long” list, very little of the ASX stock in question has been short-sold. When (or if) this stock issues bad news, not only will shareholders rush for the exits, but short-sellers will pile in. This double-blow will knock a stock lower than it would normally fall.

Other ASX stocks in overcrowded trade

Another tech darling to make it to this list is the WiseTech Global Ltd (ASX: WTC) share price, while consumer discretionary names like the JB Hi-Fi Limited (ASX: JBH) share price, A2 Milk Company Ltd (ASX: A2M) share price and Tabcorp Holdings Limited (ASX: TAH) share price are also listed.

Another group that’s stuck in an overcrowded trade are the major miners. This includes the BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price.

Others that are on the list are plumbing products group Reliance Worldwide Corporation Ltd (ASX: RWC), wealth manager AMP Limited (ASX: AMP) and fast food chain Domino’s Pizza Enterprises Ltd. (ASX: DMP).

ASX stocks that may re-rate next month

If you are wondering whether Credit Suisse made an opposite list of stocks in an overcrowded short trade, it did!

The stocks that could enjoy a re-rating during next month’s results season are the Aristocrat Leisure Limited (ASX: ALL) share price, the QBE Insurance Group Ltd (ASX: QBE) share price and the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price – just to name a few.

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Brendon Lau owns shares of Aristocrat Leisure Ltd., BHP Billiton Limited, and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia owns shares of A2 Milk, AFTERPAY T FPO, and WiseTech Global. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited and Reliance Worldwide 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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