Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Shrinking Shorts Not Shrinking Opportunities

By Matthew WardMarket OverviewOct 20, 2016 14:03
Shrinking Shorts Not Shrinking Opportunities
By Matthew Ward   |  Oct 20, 2016 14:03
Saved. See Saved Items.
This article has already been saved in your Saved Items

While shorting stocks (selling borrowed shares) receives a lot of media attention, particularly when stock markets are falling, the total value of all short positions has actually been declining throughout most of 2016, based on reports compiled by ASIC. Despite this, shorting opportunities remain in particular sectors.

The strange case of the shrinking shorts

Since the ASX All Ordinaries Accumulation Index bottomed in mid-February 2016, it has made higher highs and higher lows, while the overall value of short positions has progressively decreased. As a snapshot, the trend in the value of short positions compared to the Index is shown in the table below.


Short positions typically represent less than 2% of overall ASX market capitalisation and have a much more significant effect on individual stock prices than against the broader market index.

Investors short equities for a variety of reasons but generally it’s because they perceive such stocks as over-valued. This may be due to a belief that profit forecasts are overly optimistic or that the stock may face cyclical, structural or regulatory challenges.

Traditional shorts

Consumer retail stocks are popular shorting territory with Myer Holdings Ltd (AX:MYR) having the dubious honour of having the highest percentage of its share capital shorted. This is currently a whopping 16%, although it has fallen from almost 21% in early 2016. Many believe that increasing competition from large international retailers such as Zara, Top Shop and Uniqlo, as well as online retailers, will take a slice of Myer’s revenue base and crimp its operating margins.

Similarly Flight Centre Ltd (AX:FLT), with over 10% of its shares sold short, is facing intense competition from online travel and accommodation companies such as Expedia Inc (NASDAQ:EXPE), Incorporated (NASDAQ:PCLN), and Webjet Ltd (AX:WEB). Woolworths Ltd (AX:WOW) has over 7% of its shares shorted along with Metcash Ltd (AX:MTS) at over 11% as supermarket margins look increasingly vulnerable, partly due to the national expansion of Aldi.

The future of retail looks challenging, as global giants such as Amazon (NASDAQ:AMZN), which rarely make a profit but are rapidly increasing market share, are expected to expand into Australia.

Media companies involved in free-to-air TV, newspapers, and magazines were disrupted many years ago and Channel Nine Entertainment Ltd (BO:CHAE) still has short positions against its stock of over 5%. Even the initial disruptors such as Seek Ltd (AX:SEK) and Rea Group Ltd (AX:REA) have attracted reasonable shorts of over 5% and 3% respectively.

Fashionable shorts

More recently, short positions have been creeping up in ANZ Banking Group (AX:ANZ), National Australia Bank Ltd (AX:NAB), and Westpac Banking Corporation (AX:WBC) on the expectation that earnings growth, dividends and outlook statements will disappoint. Challenges in the banking sector such as increased competition, low credit growth, potentially higher bad debts, and greater regulation are well known. At the end of September 2016, short positions across the Big 4 banks exceeded $6 billion.

Other companies recently caught in the cross-hairs include market darlings Bellamys Australia Ltd (AX:BAL) and Blackmores Ltd (AX:BKL), where short positions have increased to over 11% and 8% respectively. While both companies are forecast to deliver future earnings growth, they were priced to perfection and increasing regulation on the import of certain ‘clean and green’ products into China combined with short-term over-supply issues were the catalysts.

Aged care service providers Estia Health Ltd (AX:EHE), Japara Fpo (AX:JHC), and Regis Resources Ltd (AX:RRL) have also been added to the shorters’ shopping list, with previously negligible short positions increasing to over 7%, 5% and 4% respectively. These companies were also highly priced and the future has become less positive due to the federal government seeking to reduce residential aged care funding outlays.

Short positions remain elevated on select resource companies including Independence Group NL (AX:IGO), Alumina Ltd (AX:AWC), and Rio Tinto Ltd (AX:RIO), despite the recent rise in certain commodity prices. Similarly, shorts remain high on resource services companies exposed to the commodity capex cycle such as Worley Parsons Ltd (OTC:WYGPY) and Monadelphous Group Ltd (AX:MND).

Short squeeze opportunities

There may be opportunities to take advantage of a ‘short squeeze’ where short sellers are forced to cover their positions by buying the stock which can result in the price rising. This may be applicable if an investor has a high conviction in a company’s favourable future earnings and their own valuation is above the market price. While the initial implementation of short positions typically results in share price underperformance, investors should look to take advantage of large, existing short positions in stocks and the timing of when they need to be covered.

An example of a highly shorted company that subsequently ‘shot the lights out’ is Fortescue Metals Group Ltd (AX:FMG), which had 7.5% of its shares shorted in February 2016. Fortescue benefitted from iron ore prices holding up above expectations, materially reducing its production cost base, and paying off a decent chunk of debt. Not only did the share price run on the news and is currently up over 200% in less than eight months, but short covering boosted the upward move as in excess of 100 million previously shorted shares were bought back.

Similarly, Mineral Resources Ltd (AX:MIN) had nearly 15% of its share capital shorted in mid-February. It also reduced production costs, benefitted from a relatively higher iron ore price, exceeded earnings forecasts, and received greater market interest in its lithium assets. The share price increased from $4 to over $11 and short positions were reduced by 90%. Other notable beneficiaries include Whitehaven Coal Ltd (AX:WHC), which is up over 600%, predominantly on higher coal prices and 60 million shares previously shorted were also bought back.

The reduction in these shorting opportunities on resource stocks is one reason for the fall in overall level of market shorts.

Shorting done well can improve returns

The share market, with or without short selling, is inefficient and price distortions are par for the course. In an environment where many stocks are considered to be priced to perfection, short selling provides certain investors with an additional strategy to improve on their returns.

Originally published by Cuffelinks

Shrinking Shorts Not Shrinking Opportunities

Related Articles

Chris Becker
19.05.22 Macro Morning By Chris Becker - May 19, 2022

Well the bounceback is finished and then some with Wall Street collapsing overnight in its worst run in nearly two years, with the NASDAQ losing nearly 5% in a single session. Sell...

Shrinking Shorts Not Shrinking Opportunities

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email