Some retail investors rarely check the ASX Top Ten Shorted Stocks List. This is not surprising given the constant drumbeat of dire warnings for retail investors to avoid shorting like the plague. Why? In theory the risk of loss with shorting stocks is infinite while the risk in buying a stock for $10 per share is no more than $10 per share should the company go bankrupt. Shorting a stock at $10 per share is placing a bet the stock price will go down. The shorts “borrow” shares at the $10 price and later buy back the borrowed shares at market value at the time to return to the borrower. If that $10 stock drops to $5 per share the short-seller “covers by buying back the shares” and pockets a handsome profit of $5 per share. However, if the stock goes up to $15 the short seller faces a loss of $5.00 per share that could keep getting larger and larger.
Shorting, investors are told, requires a degree of diligent research often beyond the abilities of the average retail investor. This can lead to the belief short sellers are “the smartest people in the room.”
History bears this out in some cases. US based hedge fund manager Jim Chanos made a fortune shorting energy giant Enron Corporation while virtually all others were pumping the stock, which eventually went bankrupt.
George Soros, a Hungarian born manager of another US based hedge fund, netted a profit of close to $2 billion dollars in his now legendary short position against the British pound, with $1 billion of that coming in a single day.
Yet the shorts do not always get it right, as Aussie retail investors who took the time to study the Top Ten Shorted Stocks List are well aware. Two of the most successful stocks on the ASX right now once had prominent positions on the short list – JB Hi Fi Limited (JBH) and Cochlear Limited (COH).
JBH vaulted to the top spot on the list in June of 2011 based largely on fears of increasing completion from offshore online discounters, a strong Australian dollar, and diminishing margins. The stock price fell from around $15 per share at that time to trade around $8.50 by June of 2012. The price as of 8 December of this year stood at $26.71.
Cochlear announced a voluntary recall of its flagship hearing implant in September of 2011 and the short sellers piled on in the unshaken belief the company would lose market share. The stock price fell overnight from $60 per share to $48, bottoming out at about $46 per share. Cochlear reached an all-time high of $142 on 5 October of this year and now trades around $116. Here is how these two targets of the “smartest people in the room” have performed over the last five years.
The current Top Ten List includes four stocks with analyst earnings estimates over the next two years in the double digits. Here are the four stocks that deserve watching.
Two of these companies are relative newcomers to the ASX with Bellamy’s listing in August of 2014 with a first day closing price of $1.31 and Aconex coming on in December of that year, closing its first trading day at $1.80. Here is how the share prices have done since.
In terms of analyst estimates Aconex appears to be of most interest, having reported earnings per share (EPS) for FY 2016 at $0.053 per share with a forecast of $0.06 for FY 2017 and $0.11 for FY 2018.
Aconex is a cloud-based Software as a Service (SaaS) provider for the engineering and construction industry with customers in 70 countries around the world. For the uninitiated, SaaS simply means a company does not buy and install needed software in- house, but rather pays an outside provider to use software maintained and housed by the provider.
The Aconex platform allows for collaboration among all parties in a project access to information needed for project completion, from initial design to turnover to the end user. All parties to a project – owners, designers, engineers, contractors, and assorted project teams – have simple access to the platform via a desktop or mobile web browser.
Rather than a sector related organizational structure, Aconex has four geographically based operating divisions – Australia and New Zealand , Americas, Asia, and Europe, Middle East and Africa .
Between FY 2015 and FY 2016 revenues rose from $82.4 million to $123. Net profit from core operations showed upward movement from a FY 2015 loss of $2.5 million to a positive $9.9 million. However, acquisition costs of $4.7 million dragged profitability down to $5.7 million. The stock price began dropping following the announcement and has lost almost half of its value. Here is the chart.
Investors may have been profit-taking but in mid-September word got out that company insiders were selling, in some cases after converting low priced options, accelerating the share price decline. In theory, experts tell us not to read too much into insider selling, as insiders, like all investors, like to cash in from time to time. Market experts claim while insider buying is evidence of expected upward movement in the share price, insiders can sell for a number of reasons, yet investors often ignore the advice. This is often especially true with stocks with high Price to Earnings Ratios.
Despite impressive forward looking earnings and a positive quarterly result released in October, short interest in Aconex has risen to 12.42%. The 8 December Thomson/Reuters analyst recommendation update shows ACX with an Outperform rating, the only stock in the table with that recommendation. One analyst is at Buy; five at Outperform; three at Hold; and one at Underperform.
Nickel miner Western Areas Ltd (WSA) boasts “two of the highest grade underground nickel mines in the world, Flying Fox and Spotted Quoll,” according to the company’s website. Both are located in Western Australia. The company also has additional projects under development here in Australia as well as in Canada and Finland.
Despite posting an FY 2016 loss of $26.7 million and a revenue loss of approximately $100 million and a depressed nickel price, WSA shares are up more than 20% over the last three months. Here is the chart.
The US election of Donald Trump shocked the world in many ways, one of which was the obliteration of doomsday prognostications of the impact of his election on global stock markets. The newly minted conventional wisdom is that his proposed massive increases in infrastructure spending will raise the demand for steel and along with it the demand for nickel, an ingredient used in steel production. As you can see, the Western Areas stock price took off following the election and the change of heart in the investing community.
Earlier in the year the share price was buoyed by a brightening outlook for the hard commodities complex and a rise in steel production. In September the stock price rallied on the price of nickel reaching a seven week high following the news of more nickel mine closures in the Philippines.
Some Analysts appear to be siding with the short sellers on this one, as the latest recommendation update from Thomson/Reuters had a consensus Underperform rating, with 4 analysts at Buy; 3 at Hold; 4 at Underperform; and 4 recommending investors Sell the stock.
Bellamy’s Australia Limited (BAL) rode to the top of the heap on the back of Chinese demand for its infant formula and appears to be reversing course on the back of concerns over regulatory changes in food and safety standards in China.The company offers more than 30 organic food and formula products for babies, toddlers, and young children. Bellamy’s is Tasmania based and has been operating in the Australian market since 2004.
Chinese demand for safer foods skyrocketed following scandals in domestic milk production that resulted in children dying. Bellamy’s has a stellar reputation but demand attracts more suppliers and other infant formula providers stampeded into the Chinese market. Many are frantically liquidating inventory in the face of stiffer regulations in China, set to take full effect in 2018. Not all providers will be able to meet the new standards so dumping existing inventory at reduced prices is in full sway.
The stock price was already in decline on these concerns when the company announced on 2 December a substantial downward revision to FY 2017 revenue forecasts attributed to “temporary volume dislocation due to regulatory changeover.” The announcement confirmed the earlier fears of the impact of inventory liquidation on Bellamy’s revenue.
The Bellamy share price has not been below $7 since September of 2015. The company’s Forward P/E is well below the Sector average of 17.01 and its current Price to Earnings Growth (P/EG) ratio of 0.21 and its five year expected P/EG of 0.41 suggest the short sellers may be wrong on this one in the long run.
Worley Parsons Limited (WOR) serves the energy and resources sectors with a range of professional services, from engineering design to construction project consulting advice and delivery. Given the collapse of oil and metal prices it is little wonder the stock price has dropped from around $30 per share five years ago to its current price around $9.50. Here is the chart.
New investors that jumped on board following the few faint flickers of hope for oil and metal prices in early 2016 have been handsomely rewarded. Worley gets somewhere around 70% of its revenue from the energy sector so should the recent OPEC agreement to freeze production jump start the price of oil, the company stands to benefit. However, WOR comes with a risk not present in the other stocks in the table – debt. As of the most recent quarter the company’s total debt was a little more than three times its total cash on hand.
