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The technique of profiting from a price fall is called short-selling, otherwise known as “shorting,” “to go short” or simply “short.” Basically, short-selling is the reverse of how we’re traditionally taught to invest, to buy at the lowest possible price and sell at the highest. When shorting, you aim to jump in at a high and out at a low – with the sequence of events also in reverse, since you sell first and buy back afterwards. Indeed, as confusing as it sounds, this involves selling something that you don’t already own.

Top 10 shorted stocks hit hard this week

The top ten shorted stocks on the ASX have all been steadily sliding for months now, although to be fair the Aussie market sits at an 11-month low so there are few stocks that can boast stellar gains. However the shorters do seem to know what they’re on about – nine out of the ten shorted stocks were lower this week, with only Aristocrat (ALL) making a gain because some massive trades went through earlier in the week at above the market price. The trades were worth some $32 million and represented 2.5% of total shares; it seems someone wanted to get in quickly. ALL was one of only three out of the ten stocks that outperformed the ASX200 index this week.

To add further weight to the shorters insight, David Jones had been one of the top three shorted stocks for weeks before its shock earnings announcement sent the share price plunging 18% in a single day. DJS lost a further 6% this week, to be down 37.6% over the past three months. Likewise Fairfax, which has taken out one of the top two spots for some time now, has been hammered, losing almost 40% of its value in the past six months.

Today we’re looking at Harvey Norman, which sneaked into the top 10 shorted stocks this week. 

 Position

 Last week

 Company

 Stock Code

 % of shorts

 Share Price

 Weekly Change

 % Change

 1

 1

 JB Hi Fi

 JBH

17.38%

$15.00

-$0.74

 -4.7%

 2

 2

 Fairfax

 FXJ

12.46%

 $0.88

 -$0.055

 -5.9%

 3

 5

 Gunns

 GNS

7.81%

 $0.25

-$0.02

-7.4%

 4

 4

 Billabong

 BBG

7.79%

$5.89

-$0.18

-3.0%

 5

 3

 David Jones

 DJS

6.87%

 $3.00

-$0.19

-6.0%

 6

 6

 Perpetual

 PPT

6.28%

 $23.58

-$1.18

-4.8%

 7

 7

 Boral

 BLD

5.44%

 $4.17

-$0.12

-2.8%

 8

 8

 Aristocrat

 ALL

5.31%

 $2.44

 +$0.08

+3.4%

 9

 11

 James Hardie

 JHX

5.26%

 $5.73

-$0.23

-3.9%

 10

 9

 Wotif.com

 WTF

4.84%

 $4.60

-$0.24

-5.0%

 

 

 ASX200

 XJO

 

 4424.60

 4602.90

-3.9%

 

Shorters and brokers bet against HVN

Consumer staples are generally said to be defensive because their earnings tend to hold up in challenging times – shoppers still have to buy life’s necessities. In contrast, the earnings of discretionary retailers like Harvey Norman  suffer in response to higher interest rates, general price rises and higher utility charges.

Times are tough for retailers. David Jones, Myer, Harvey Norman and JB Hi-Fi are facing a new breed of thrifty consumers. It comes as little surpise that inflation-adjusted growth in retail sales for the current fiscal year will come in at 1.3% – the worst performance in 20 years, according to Deloitte Access Economics.  However, in 2011/2012, Deloitte expect growth of 2.2% followed by 3.3% growth in 2012/2013.

 

Broker calls

Brett Schreuders, Alto Capital
Sell
While the share price has retreated considerably from a 12-month high last September, the future looks difficult for discretionary stocks. With cost-of-living pressures on just about everything, including utilities, food and the family mortgage, we recommend cutting losses and being more defensive in the current market.

James Samson, Lincoln Indicators
Sell
After a dreadful period for the retail sector, we expect sentiment for discretionary retailers to remain poor, particularly for those selling consumer electronics. Consumers are wary about spending, especially on big-ticket items. We believe downside risks are prominent.

RBS Morgans analyst Richard Ivers said the consumer spending downturn was affecting retailers in all income categories.

‘The report by DJs on Wednesday night was a real lightening-rod moment when everyone really appreciated how weak it is out there,’ he said.

‘The company’s commentary was particularly bearish and concerning in the fact that the weakness was so broad based.’

Mr Ivers said there was bad news ahead for the sector.

Apparel, electronics and home entertainment were particularly weak, with stores like JB Hi-Fi and Harvey Norman struggling with electronics sales, particularly televisions.

‘Retail is likely to stay weak for some time, and if it does improve there’s the potential for the RBA (Reserve Bank of Australia) to increase interest rates,’ he said.

Financials

Outlook

F

 

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