Each Saturday, we publish a list of the 20 most-shorted stocks (see https://switzerreport.com.au/sr-sat-stock-players-are-becoming-less-tech-preoccupied). The list is compiled from data released by ASIC, who tabulate position reports from short sellers.

Short selling is selling something you don’t own. A short seller profits from a falling price – selling at a higher price first and then buying back at a lower price.

To short sell a stock (something you don’t own), you need to be able to “borrow” the stock to make the delivery on the ASX.  This is where the major fund managers and large superannuation funds come in – they lend the stock to the short sellers. In return, the short seller secures the loan by giving the super fund cash. When the short seller closes the position on the ASX by buying the stock back, they return the stock to the super fund and get their cash back. The super fund gets paid for lending the stock by taking a margin on the cash.

Let’s look at the 4 types of short sellers

Broadly, there are four “types” of short sellers.

1. The first is a simple outright short sale – “company ABC is a dog of a company” – so the short seller sells ABC.
2. Secondly, the relative short sale that involves being “long” one company and being “short” another company in the same sector. Essentially, the short seller is saying that company A will do better than company B. Examples could be buy Woolworths and sell Coles; buy Fortescue and sell Rio. By being long one stock and short the other, the short seller isn’t taking market or industry risk, just relative stock performance risk.
3. The third type is a sector position, where companies from a particular industry or sector are sold because the short seller thinks that there are significant headwinds, or they are over-hyped and over-priced.
4. The final type relates to market makers and other professionals hedging derivative positions such as exchange traded options and warrants.

Let’s focus on the third type of short selling

It’s the third type, the sector view, that I want to focus on, because it tells us there are professionals who feel that certain industry/sectors are either “over-hyped” or vulnerable to the macro-economic environment. That’s not to say that they will be right, but historically, these professionals tend to be right more often than they are wrong otherwise they would be out of business.

Analysing the data, the first conclusion we can draw is that the short sellers are bearish on uranium and remain concerned about lithium. The positions in lithium stocks are lower than they were 12 months ago, but they are still considerable.

The tables below show the relative ranking of some of the major uranium and lithium stocks.

Boss Energy (BOE) is the most shorted stock on the ASX. 19.1% of its ordinary shares, or 78.4m out of a total of 409.7m shares, are sold short. The short position is worth about $300m. Paladin Energy (PDN) is the second most shorted stock on the ASX, with 16% of its ordinary shares sold short, while Deep Yellow is the ninth most shorted stock with 10.8% of its shares sold short. To put these into context, most stocks on the ASX have short positions that are less than 1%.

The short sellers are also not keen or rare earth are other specialty miners.

The second conclusion is that the short sellers are still bearish on some discretionary retailers. While these positions have reduced, they are still material, as the following table shows.

Thirdly, there are stocks in the “unloved” category where the short sellers are looking for the price to continue to fall. Also, there are several former “high flying” tech companies that have copped a beating.

Domino’s (DMP’s) short position probably reduced on Friday, following a very strong rally after announcing the closure of several hundred unprofitable stores, ASIC’s figure are unfortunately 3 working days behind the actual trading on the market.

Where are the short sellers NOT “short”?

Although not as useful as knowing where they are short, there is some value in knowing where they are not actively playing. Short positions in the major stocks are relatively small, with short sellers not particularly active in the major miners or major banks.

RIO is the odd one out here. It is a dual listed stock, and the high short position is likely due to an arbitrage between the London listed RIO shares (which are arguably cheap) and the ASX listed RIO shares which are arguably expensive).

Rounding out the major companies on the ASX, CSL has 0.5% of its shares sold short, Woolworths is 0.6%, Telstra is 0.1%, Woodside is 2% and Wesfarmers is 0.7%.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.