When investors short a share they are borrowing shares to sell on market with the aim of buying them back at a cheaper price further down the line. It can be a lucrative investment strategy, but comes with high risks and theoretically limitless losses.
Whilst short sellers don't always get it right, I believe investors should be wary about investing in shares with high short interest, as it could be seen as an early warning sign of a share price decline.
According to the most recent data provided by ASIC, these are the 10 most shorted shares on the ASX:
- Aconex Ltd (ASX: ACX) continues to be the most shorted share on the ASX. This week the software-as-a-service company has short interest of 16.4%. Although its shares have fallen 32% in the last six months, short sellers appear to believe it can still fall further.
- Myer Holdings Ltd (ASX: MYR) has seen short interest fall for a second week in a row to 16%. I believe there's a good chance the department store operator will report strong Christmas sales, so short sellers may want to be careful.
- Western Areas Ltd (ASX: WSA) has 13% of its shares held short. Short interest has risen sharply since Indonesia lifted its ban on nickel exports. I expect this to postpone the predicted recovery in nickel prices for another year.
- TFS Corporation Limited (ASX: TFC) has 11.1% of its shares in the hands of short sellers. Although this is a sharp drop from last week, short interest in the sandalwood plantation manager is still at some of the highest levels in recent times.
- Vocus Communications Limited (ASX: VOC) has seen short interest jump up to 10.9%. Although rising short interest is a concern, I still believe its bargain price means Vocus provides investors with a compelling risk/reward profile.
- Syrah Resources Ltd (ASX: SYR) has 10.6% of its shares held short. Despite the high short interest this graphite miner's share price has rallied higher by 10% so far in 2017 compared to a slight decline by the S&P 200.
- Nine Entertainment Co Holdings Ltd (ASX: NEC) has short interest of 11.2%. Despite the media company's shares losing 36% of their value in the last 12 months some short sellers appear to believe there's further to go.
- Worleyparsons Limited (ASX: WOR) is once again being targeted by short sellers. The mining services company has short interest of 9.4%. As competition is fierce and margins are low, I would avoid Worleyparsons and the industry as a whole.
- Metcash Limited (ASX: MTS) has seen short interest drop sharply to 10.4%. This is the second week in a row this has happened, which could be interpreted as a sign that investors are becoming bullish on the wholesale distributor.
- News Corp (ASX: NWS) is another media company with high short interest. News Corp has 9% of its shares in the hands of short sellers, down slightly from last week.
