While ASX-listed stocks may find it hard to impress the market at the best of times, some stocks incur the added burden of being heavily exposed to short selling.
Traders brave enough to take a strong short-selling position can make it doubly hard for a clean set of numbers to find its way to the share price, and the greater the short selling the harder that may become.
While short selling is a technically complex investment strategy, the goal is fundamentally simple: It's about making money from a falling share price by selling shares now and buying them back later at a lower price.
And while short selling is a game typically played by institutional investors, the implications for ASX retail investors are enormous.
They can provide strong insights into financial market sentiment towards certain stocks and more importantly those stocks where trading activity is heavily exposed to them making money on the downside.
A dozen stocks to watch closely this reporting season
Based on the latest ASIC data available, the ASX has 12 stocks where short selling activity exceeds double digits.
Ten of these stocks are large cap stocks, each with over $1 billion in market cap - a collective market cap of $28.5 billion - and nine are in the ASX300 which means that by default, they’re heavily traded regardless.
The most short-sold stock on the ASX is minerals and uranium explorer Boss Energy (ASX: BOE) where virtually one in every five (19.61%) trades is a bet on the price falling (see table below).
The next three most short-sold stocks on the ASX right now include uranium producer/exploration Paladin Energy 16.59% (ASX: PDN); industrial minerals and technology company Syrah Resources 13.10% (ASX: SYR); and pizza chain operator and former ASX darling Domino’s Pizza Enterprises 12.85% (ASX: DMP).
What is short selling trying to tell you?
Rather than being done randomly, short selling typically reflects an underlying narrative about a stock or the sector within which it operates.
For example, included within these 12 stocks is the beleaguered Star Entertainment Group (ASX: SGR), which has shed 76% of its share price in one year and 34% year to date with the market fearing it’s heading for an imminent collapse.
Then there’s Mineral Resources (ASX: MIN) which despite being accused of having questionable management still has some quality underlying assets.
Collectively, these 12 stocks have been sold off by an average of 38% over the past 12 months.
Worthy of separate mention, one of these top 12 shorted stocks is actually Treasury Bond 3.50% 21-12-34 SEMI (ASX: GSBW34) which, according to ASIC data, has short selling activity of 127.97%.
Given that good stocks can often get caught up in short-selling activity as well as bad ones, it’s important to monitor whether the volume of shorting is going up as it may flag that you’ve missed something about the company’s underlying activities.
Then there are times when short sellers may target a stock to spook its shareholders which can end up perpetuating an unfounded, yet profitable, short-selling opportunity.
It can also incentivise false claims against a “short target” company to create market panic, and we've seen short-sellers have a go at logistics company WiseTech Global Ltd (ASX: WTC) many times.
Full list of 12 most-shorted stocks
Understanding short-selling
When an investor “shorts” a stock, they’re betting on the share price falling over the short to medium term.
Without delving into the minutiae, it’s critical to know that traders use borrowed shares when short-selling stock.
This means shorting is leveraged trading not unlike trading on margin.
While short sellers can potentially make nice returns with little to no initial outlay, the opposite is also true and when the market moves against them, they can end up seriously out of the money.
Don’t forget that when short-sellers get spooked, they will by default push the share price higher, which means the last shorters - typically hedge funds and investment companies - to get out are left with the biggest losses.