Are Nufarm and 2 other shorted ASX stocks a buy?

Nufarm Limited (ASX: NUF) and these 2 others are among the most shorted stocks on the ASX and could be long-term buying opportunities.

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According to shortman.com.au, these are some of the most shorted stocks on the ASX right now and could present incredible buying opportunities if their business conditions improve.

Nufarm Limited (ASX: NUF)

Nufarm is the second most shorted stock on the ASX with a 17.78% short holding in the company. The Nufarm share price has suffered in 2019, down nearly 25% for the year. Drought in Australia and floods in the US have affected crop and livestock production, putting pressure on the demand for crop protection. This has resulted in an oversupply of product and reduction in profit margins, which prompted the company to issue profit downgrades for the full year. Supply chain headaches and registration issue in Europe have also added to the short interest in the company. Nufarm, however, does have a very promising seed business and has developed and Omega-3 derived from canola that has the same levels of DHA as regular fish oil. The plummeting share price has also drawn speculation of potential takeover bids for the company, which reflects that there could still be value in the long term.

Bellamy's Australia Limited (ASX: BAL)

Infant formula producer Bellamy's is the fifth most shorted stock on the ASX with 14.17% of the company's shares shorted.  Despite the heavy short interest, the Bellamy's share price is actually up nearly 17% for the year. The pessimistic outlook on Bellamy's is a result of the company's delayed SAMR accreditation which it requires in order to sell products in mainland China. In addition, recent infant formula restrictions proposed by China could make the process of gaining accreditation harder. Bellamy's could present a buying opportunity as the proposed legislation may not be as stringent as first thought. If accreditation is granted Bellamy's has a strong brand which could translate into strong sales and earnings growth.

Inghams Group Limited (ASX: ING)

Inghams is the third most shorted stock on the ASX with a 16.9% short holding in the company. The company's share price has remained relatively flat in 2019, up nearly 4% for the year. Inghams has gained short interest as investors fear that higher input costs could erode margins and profitability. Drought and reduction in grain volumes have driven feed prices higher, hence increase costs for the company. The poultry supplier fell even further out of favour with investors earlier this year when the company had to recall a line of products due to contamination.  The departure of both the CEO and CFO since listing has added to investor concerns. However, Inghams has only been listed on the ASX for two and a half years and has been one of the better IPO performers since listing at $3.15.  To date, the company has met its prospectus forecasts and although margins may be tight at the moment the share price may improve with conditions.

Foolish takeaway

Investors take short positions in companies because they believe that the share price will fall, therefore buying heavily shorted stocks can be extremely risky. In the case of these three companies, a more prudent strategy would be to keep them on a watchlist to monitor. Any substantial change that could benefit their trading environment and future growth could make them good buying opportunities for the long term as investors who shorted the stock will be looking to unwind.

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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