When investors think that a particular share is overvalued they can "short" that share in order to profit from it falling in value. When you short a share you borrow it and then sell it on the market with the aim of buying it back at a cheaper price further down the line.
In a bear market it can be a good strategy, though it certainly remains a high-risk one. When you buy a share the worst you can do is lose your original investment if it drops to zero. But when you short a share those losses can theoretically be infinite as a share price can just keep rising and rising.
For this reason short sellers will only short a share when they have a high conviction of success. Whilst they don't always get it right, I do believe that investors should pay close attention to rising short interest in shares they own.
The 10 most shorted shares as of October 31 according to data provided by ASIC are as follows:
- Myer Holdings Ltd (ASX: MYR) has not only retained the unwanted crown of being the most shorted share on the ASX, but has seen a jump in short interest. Currently 17.5% of the retailer's shares are held short.
- Worleyparsons Limited (ASX: WOR) continues to be a favourite of short sellers. The mining services company has short interest of 14.3%, down slightly from last week.
- Western Areas Ltd (ASX: WSA) has 14% of its shares held short. The leading nickel producer has seen a small decline in short interest since last week.
- Bellamy's Australia Ltd (ASX: BAL) is yet again under fire from short sellers. The infant formula manufacturer has seen short interest reach its highest level this year at 12.4%.
- Metcash Limited (ASX: MTS) has 10.9% of its shares in the hands of short sellers. Short interest in the wholesale distributor has remained flat on last week.
- Nine Entertainment Co Holdings Ltd (ASX: NEC) has seen short interest hit a new high for 2016 as investors become bearish on the media company. At present 10.7% of its shares are held short.
- Aconex Ltd (ASX: ACX) is another company which has seen short interest shoot to a record high for 2016. 10.4% of the software-as-a-service company's shares are now in the hands of short sellers.
- Monadelphous Group Limited (ASX: MND) has seen short interest drop to the lowest level since August. The mining services company has 10.3% of its shares held short.
- TFS Corporation Limited (ASX: TFC) has seen short interest rise to a year high of 9.7%. Clearly investors are becoming more and more bearish on the sandalwood plantation manager.
- Alumina Limited (ASX: AWC) has 9.5% of its shares held short. Although this is a big improvement from earlier in the year, investors still appear to be reasonably bearish on the alumina and bauxite producer.
