Short selling has become a topic of hot debate recently.
Some investors think it is the root of all evil in the stockmarket (although covered short selling is perfectly legal), while others believe it provides additional liquidity and opportunities for buyers to invest at lower prices.
It is unlikely that the rules regarding short selling will change dramatically anytime soon so investors should get used to the fact that some of their favourite stocks may one day come to the attention of short sellers.
If you are are confident about your investment then this should not worry you. A lower share price in the short term is a positive for long-term investors as it allows you to build a larger position at a lower cost.
The flip-side is that the short selling can persist for an extended period of time and this can affect sentiment. Investors can get scared out of the market on the assumption that the short sellers know something they don't – even though most times they don't.
Some interesting shares which have recently seen a spike in short selling interest are outlined below:
Bellamy's Australia Ltd (ASX: BAL)
Since the start of 2016, short interest in the organic baby food maker has sky-rocketed and is now more than 8% of the issued shares.
The latest round of short selling is the result of uncertainty surrounding the Chinese government's move to increase restrictions and taxes on imported foods. This has impacted sentiment in the sector, despite the company saying it is confident any changes will not impact its future sales into the region.
Bellamy's is a clear example of how a high valuation combined with a change in sentiment can cause a dramatic reversal in a share price.
Australia and New Zealand Banking Group (ASX: ANZ)
All of the big four banks have been the subject of increased short selling in recent times, but ANZ has been by far the most targeted.
This is understandable considering it has already stated that its bad debt charges are increasing and that its Asian growth strategy is not quite meeting expectations. The market is also factoring in a possible cut to its dividend.
ANZ has been the worst performing big bank and with short positions still at historically high levels, some participants believe there could be further falls to come.
Although the level of short positions for Domino's is relatively low compared to other shares, it is nevertheless interesting to note the recent spike in short positions.
In this situation, it comes purely down to valuation with the shares trading on an eye popping price-to-earnings (P/E) ratio of 65. Obviously some traders believe this is unsustainable despite the positive news flow that is coming out from the company. This is definitely a stock to watch.
Corporate Travel Management Ltd (ASX: CTD)
The increase level of short selling in Corporate Travel is surprising and comes down to one thing – valuation.
The shares hit an all time high of $15 this week on the back of another strategic acquisition and this sees the shares trading on a forecast FY16 P/E ratio of around 38.
On the back of this week's strong share price performance however, there is little doubt that the short sellers are starting to get nervous.
Foolish takeaway
Short sellers can focus on a specific stock for a multitude of reasons but they are not always successful.
If you believe in your company and its management, then this can sometimes provide you with an excellent opportunity
