Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 178

Shrinking shorts not shrinking opportunities

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 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, with over 10% of its shares sold short, is facing intense competition from online travel and accommodation companies such as Expedia, Priceline, and Webjet. Woolworths has over 7% of its shares shorted along with Metcash 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, 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 Nine Entertainment still has short positions against its stock of over 5%. Even the initial disruptors such as Seek and REA Group have attracted reasonable shorts of over 5% and 3% respectively.

Fashionable shorts

More recently, short positions have been creeping up in ANZ, NAB, and Westpac 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 Bellamy’s and Blackmores, 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, Japara, and Regis 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, Alumina, and Rio Tinto, 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 and Monadelphous.

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, 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 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, 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.


Matthew Ward is Investment Manager at Katana Asset Management. This article is general information and does not consider all the risks associated with shorting stocks or the circumstances of any individual.



Social media’s impact is changing markets

Reddit v hedge: GameStop rides to the moon and back

Shorting deserves more respect


Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates


Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?


Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.


Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.