Thanks to the Australian Securities & Investments Commission short position reports, all investors can see which stocks are currently being targeted by short sellers.
Short-selling is the act of taking shares from a lender (e.g. broker, index fund etc.), selling them at a high price, then buying them back it a lower price and pocketing the difference. Obviously the assumption held by short sellers is that share prices will fall.
Whilst that might sound simple enough, short-selling isn't widely used by everyday investors, nor should it be. The consequences of getting it wrong are significant.
However, for 'professionals', it can be a useful strategy when they believe a stock is going in only one direction. For certain index funds – those who must buy every stock in the index – it can also be a worthwhile hedging tool.
Whilst observing and following the moves of investing professionals could be profitable, it can also save everyday investors a significant amount of money.
Indeed of the top 15 most shorted stocks on January 2, 2014, 10 dropped over the subsequent year. Some more heavily than others.
According to The Australian Financial Review, more than 10% of shares in Metcash Limited (ASX: MTS), Myer Holdings Limited (ASX: MYR) and Monadelphous Group Limited (ASX: MND) were held for short sale at the beginning of 2014. Throughout the year, they each fell over 40%.
However, the short sellers aren't always right. Western Areas Ltd (ASX: WSA) and Fairfax Media Limited (ASX: FXJ) were also heavily shorted but rose 65% and 34% in 2014.
Who's on the list this year?
Unsurprisingly, short-sellers are bearish on stocks in the retail and mining sectors. Myer was the ASX's most heavily shorted stock leading into 2015, whilst iron ore miners Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO) had around 10% of their stocks reported as being shorted. Acrux Limited (ASX: ACR) and JB Hi-Fi Limited (ASX: JBH) were the second and third most heavily shorted on January 2nd, 2015.
Throughout 2015, there's no doubt some of these stocks could be headed downwards however some could also turn out to be dirt cheap and experience a dramatic rise!
Buyer beware.
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