Should you avoid these heavily shorted companies?

It's not rocket science to realise that if you avoid losing money, you should make good money.

Tom Richardson

Tom is a holder of the CFA Society of the UK administered Investment Management Certificate (IMC) and has more than a decade's professional experience in the investment management industry in Australia and the UK. Tom now works as a writer and editor for TMF Australia and has two easy to remember rules of investing he likes to follow. Avoid overpaying for growth stocks and avoid paying at all for stocks that are cheap for a reason. Tom prefers growth investing over value investing and says it's not rocket science, just avoid overpaying for the best returns.

Published June 30, 2014 9:36 am AEST

When it comes to investing negative trends and their impact on stock price movements are often easier to identify than positive trends and their potential impact on stock prices. This is because negative trends tend to be driven by structural shifts or technological change that are permanent and likely to accelerate. Hedge funds spend time identifying these trends in an attempt to profit by borrowing stock to sell with the intention of buying it back later at a lower price in the future.

ASIC reports short positions as a percentage of outstanding stock and here are some of the most heavily shorted companies that investors may be well served to avoid for now according to its latest report.

Traditional media stocks are facing some serious revenue headwinds as advertising revenues continue to fragment away from traditional print and free-to-air television sources. Those feeling the pain include Fairfax Media Limited (ASX: FXJ) and News Corp (ASX: NWS ) with 3.21% and 10.21% of stock shorted respectively. Broadcaster Ten Network Holdings Limited (ASX: TEN) has 6.6% of its stock shorted as revenues fall and it struggles to make television shows that sufficient numbers of people want to watch.

Resources stocks are also in the hedge funds' sights, with some betting nickel miner Western Areas Ltd (ASX: WSA) is overvalued despite a surging nickel price, Western Areas has 7.35% of stock short sold. At least Western Areas is mining a commodity experiencing strong price rises, unlike other resources stocks such as rare earths miner Lynas Corporation Limited (ASX: LYC). It has 4.86% of its stock shorted, while uranium miner Paladin Energy Ltd (ASX: PDN) has 10.88% of stock shorted. Meanwhile coal miner WHITEHAVEN COAL LIMITED (ASX: WHC) is facing lower-than-expected metallurgical coal prices and larger-than-expected public protests over some of its key projects. No surprises that many see its future as uncertain with 7.18% of stock shorted.

Another business that has been under pressure is Transfield Services Limited (ASX: TSE). The provider of staffing and operational services to public and private sector clients has 6.15% of its stock shorted and investors should tread carefully for now. If you're looking for outstanding opportunities you would be much better served looking for little known dividend-paying machines, with plenty of growth potential, just like the one we've found below.

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