Many investors will be familiar with the practice of short selling where the seller borrows the shares from a counterparty to sell on the market, pockets the cash, and then hopes to buy back the shares later at a cheaper price to return to the counterparty.
The borrowers or short sellers are any of the numerous 'long-short' or hedge funds in operation within Australia, while the lenders are usually large investment banks acting as prime brokers on behalf of the hedge funds.
In fact you will often see large investment banks like UBS Warburg or Deutsche Bank listed as substantial holders of heavily shorted securities.
This is not because they're shorting the securities themselves, but rather lending out large amounts of the securities in their name in return for fees from their hedge fund clients.
These hedge funds often conduct detailed research on what shares are most likely to fall over the short term, so it's worth paying attention to what might be their favourites to fall.
Below are the top 10 most shorted shares according to the latest ASIC report on December 30, 2015.
- JB Hi-Fi Limited (ASX: JBH) percentage of securities sold short – 19.25%
- Metcash Limited (ASX: MTS) percentage of securities sold short – 18.45%
- Myer Holdings Ltd (ASX: MYR) percentage of securities sold short – 16.38%
- Flight Centre Travel Group Ltd (ASX: FLT) percentage of securities sold short – 13.80%
- Western Areas Ltd (ASX: WSA) percentage of securities sold short – 13.60%
- Orica Ltd (ASX: ORI) percentage of securities sold short – 13.44%
- Alumina Limited (ASX: AWC) percentage of securities sold short 12.88%
- Greencross Limited (ASX: GXL) percentage of securities sold short – 12.86%
- Monadelphous Group Limited (ASX: MND) percentage of securities sold short – 12.53%
- Mineral Resources Limited (ASX: MIN) percentage of securities sold short – 11.84%
Unsurprisingly, there are several mid-cap mining companies in the above list that are exposed to metals prices.
The most shorted miner is nickel and copper miner Western Areas, which is likely to be under pressure after recent heavy falls in copper and nickel prices as China posts weaker-than-expected economic data.
In fact copper prices are often considered as a proxy for emerging market and Chinese growth, so Western Areas' position near the top of the list may be an inauspicious omen.
IGA operator Metcash is expected to face competitive pressures in the supermarkets space, while Myer is another favourite of the short sellers due to its struggling sales and online competition. The rise of the internet is a similar reason why investors are betting against Flight Centre.
JB Hi-Fi is top of the list, and it has been climbing fast this week in what is probably a good example of a short squeeze, where short sellers are forced to close out positions (probably at a loss) after a business receives unexpected buying support.
JB Hi-Fi being supported this week due to the surprise insolvency of rival Dick Smith Holdings Ltd (ASX: DSH).
Another business I would not bet against is revealed below…
