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Why should bargain-hunting retail investors pay attention to the Top Ten Short List?  Investors who short stocks are purported to be among the smartest of investors, with minds of steel capable of spotting stocks in trouble. Yet shorting stocks carries potentially catastrophic risk.  If you buy 100 shares of a stock at $10 per share, your potential risk is capped at $1,000 should the company slip into receivership.  When you short that same stock at $10 you are making a bet the stock price will go down.  You “borrow” 100 shares and at some point you have to buy the shares to pay back what you borrowed.  The reward comes when the stock falls to $7, or $5, or $3 in which case you collect the difference between your short price and the price at which you covered (buy back) the shares.
Now suppose the stock price goes the wrong way, rising to $15 or $20, or higher?  The short seller has to buy back the borrowed shares at the higher price and lose the difference. The risk here is infinite as in theory the stock price could go to $100 or higher, resulting in a massive loss.  As a result, retail investors are advised to leave shorting to professional investors who have the time and resources to thoroughly research a stock and its potential.  
However, some retail investors are bold enough to take a chance on a heavily shorted stock, knowing that sometimes the short sellers get it wrong.  Perhaps the best example of this is a perennial favorite of the shorts, JB Hi-Fi (JBH).
About five years ago the king of low price electronics was challenged by offshore online sellers with drastically lower prices.  Analysts expressed concerns about how JBH could maintain its margins and the shorts piled on, dating back to late 2011.  To cement the argument the shorts don’t always get it right, let us add Cochlear (COH) to the discussion.  In September of 2011 Cochlear recalled one of its hearing implants, leading analysts to warn of declining market share as the recall would open the door for the company’s competitors.  The shorts jumped on board. In case you were unaware, here is how this worked out for the shorts.  The following five year price movement chart shows the drop in share price for both companies and the aftermath.
The shorts just can’t seem to get enough of JBH.  The stock fell off the short list in late 2013, came back in 2014, left in 2015, and now they are back again.  JB Hi-Fi is once again one of the top ten shorted stocks on the ASX.  
Could JB Hi-Fi beat the shorts again?  Are there other stocks on the Top Ten Short List that the shorts may have wrong?  The following table shows all of the Top Ten, ranked by percentage of the float (tradable shares) shorted. The numbers reflect closing prices for 15 June.
Five of the ten are linked to the resources sector – oil and gas, mining, and mining services.  Some of them provide services to these sectors and benefited heavily in the glory days of the mining and energy boom when existing mines were expanding and exploration was rampant.  Add to that the infrastructure needs of the burgeoning LNG facilities and you had a recipe for satisfied shareholders.  With the death of the boom, the need for blasting, drilling equipment, and port and rail expansion withered.  
The numbers alone could scare off would be investors, but the prospects of the sectors in which most of these stocks operate may actually be worse.  
Worleyparsons (WOR) is a diversified engineering and construction company that serves the mining sector as well as oil and gas.  Earnings per share have been declining for at least the last three years, with no end in sight. Optimists might make the argument that the recent rise in some commodity prices bodes well for the future of companies like WOR.  However, the counter argument seems stronger.  That is while the price recovery may continue, how long will it be before the resource companies are willing to invest in expansion again?  Granted that shuttered wells and mines may come online again, but that may not be enough to resurrect these beaten down service providers.
Monadelphous Group (MND) is similar in scope to Worleyparsons and faces the same challenges.  Orica Limited (ORI) provides blasting services for resource companies around the world, which are currently not in great demand.  
Independence Group (IGO) mines nickel, copper, and zinc but its 30% interest in the Tropicana Gold project had the share price thriving through 2015.  The glimmer of hope with the recent mini-recovery in the base metals the company also mines was dashed by the company’s recent poor results and rising debt.  The formerly healthy balance sheet now shows about $72 million total cash against about $195 million in debt, both as of the most recent quarter.  To top it off, gold production at Tropicana dropped while AISC (All in Sustaining Costs) are increasing.
Alumina Limited (AWC) got a big boost from the recent increase in the price of aluminum. The share price has been hot since January of this year.  Here is the price movement chart for AWC.
However, both JP Morgan and Goldman Sachs predict the price of aluminum will fall over the next 12 months, with Goldman predicting a decline as high as 20%.
There may be some bargains in the remaining five stocks.  Based strictly on the earnings forecasts and year over year share price performance, Myer Holdings (MYR) may present the highest risk while JB Hi-Fi (JBH) seems to be the best bet.
Myer has been breaking the hearts of its investors since its ill-fated IPO back in 2010.  Here is the price movement chart for MYR since it began trading on the ASX.
As you can see the share price has actually been going up over the past year and is now only down 4%, year over year.  Investors appear to be buying into the company’s turnaround strategy. The strategy may be responsible for the company’s recent increases in revenue and same store sales, although profitability remains elusive. 
Not long ago Metcash Limited (MTS) seemed doomed.  Analysts opined the wholesaler to the IGA (Independent Grocers Association) network simply couldn’t compete in the grocery price wars with rivals Aldi’s, Wesfarmers, and Woolworths.  A grand turnaround strategy was put in place, beginning with the sale of the company’s automotive division.
Something must be working as the stock is now red hot since falling below one dollar on 22 September of 2015, closing the day at $0.99.  Here is what has happened since.
Some analysts claim the company’s recent financial results coming in better than expected might have led to short covering, driving up the share price.  The company also got positive press from speculation it might be interested in buying some of Woolworth’s troubled Masters Home Improvement sites. The share price has risen 20% in the last month alone with no news to account for the rise.  However, the company’s Full Year 2016 results to be announced this week may be raising investor expectations.  Credit Suisse upgraded its target price on MTS to $2.25 on 20 May.  The stock price has made the ASX Top Gainer of the Day list multiple times over the last month, reaching a 52 week high of $2.28 on 14 June.
Flight Centre Travel Group (FLT) is a full service travel agency serving both the corporate and consumer market with discounted domestic and international flights and hotel rooms as well as holiday packages and cruises. 
The company operates about 2,500 “brick and mortar” travel offices as well as an online booking site.  Flight Centre is facing increasing competition from discount providers that operate exclusively online as well as discounted air fares.  Flight Centre is in the unenviable position of bearing the costs of maintaining its physical locations as well as the cost of investing heavily in online operations to keep up with the competition.
On 24 May the company issued revised guidance, warning of a 5% year over year decrease in profit, despite rising revenues. Earlier in the year the company had reiterated guidance of a 4-8% increase in profit.  In defense of the company one could point to uncertainty here about the impact of the upcoming federal election; a decrease in US travel purportedly due to fear of the Zika virus; a drop in UK travel due to the upcoming vote on the exit of the UK from the European Union; and substantial discounting on international travel.  While these issues may be short term, the longer term issue of the costs of maintaining a brick and mortar operation and at the same time expanding online capability remains.  There are analysts that feel the brick and mortar operations should be relegated to the dustbin of industrial history.
Bellamy’s Australia (BAL) listed on the ASX in August of 2014 closing its first day of trading at $1.29.  The share price has risen close to 750% in that time.  Here is the chart.
The continuous upward movement was interrupted at the start of the 2016 trading year after reaching an all-time high of $16.50 in December of 2015.  While some of the decline could be attributed to profit taking, a larger concern comes from the Chinese government’s decision to regulate sales of the baby formula produced by Bellamy’s and others.
It appears there is a “grey market” in infant baby formula originating here in Australia with “buyer’s agents” or “personal shoppers” buying up formula online here which is then exported to China to be resold at dramatically higher prices.  The Chinese government is moving to restrict imports from this form of distribution.
Bellamy’s also faces competition from other Australian infant formula manufacturers a2 Milk Company (A2M) and Blackmores (BKL).  The competition threat is real but the investors should recognize the Chinese regulations will impact distribution, not demand.  The demand remains and according to analysts is growing.  Note that although a two year earnings forecast is not available for Bellamy’s, earnings per share is expected to more than double between FY 2015 and FY 2016, a figure not likely to be affected by the changes in the regulatory environment in China. The longer term issue is how Bellamy’s and its competitors adjust their distribution channels to meet the Chinese demand that by all accounts is still growing.
Finally, we have JB Hi-Fi (JBH).  On 11 May the stock price hit an all-time high of $24.81 and has dropped about 5% since that milestone.  There are new concerns about the future of JBH that apparently are yet again piquing the interest of short sellers. 
In 2012 the company announced it was expanding its business model to include white goods, a move criticized by some.  Based on historical performance it certainly appears that move along with the company’s concerted efforts to protect its margins has worked.
Over the last five years the company has posted an annual earnings growth rate of 4.9% along with a dividends growth rate of 6.4%.  The average annual rate of total shareholder return (price appreciation plus dividends) over five years is 12.1% with a 17% return over three years.  
On 19 May JB Hi-Fi announced its interest in acquiring privately held white goods retailer, Good Guys, and the share price popped in eager anticipation of adding the 100 stores operated by Good Guys.  Within a matter of days Good Guys announced it was considering going public and the JBH share price began to drop.  Here is the chart.
Although JB Hi-Fi and rival Harvey Norman (HVN) will both benefit from the demise of Dick Smith, but looming on the horizon is the threat of increasing competition from US retailer Costco (NASDAQ:COST) and speculation Amazon (NASDAQ:AMZN) may be looking to ramp up its presence in Australia.  Although Amazon operates in Australia, it lacks the massive local distribution network here that has made its US operations so successful.

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