The most shorted stocks in Australia
The covid effect, poor results, and trade tensions with China have sharpened short-seller interest in a number of Australian companies.
Mentioned: The a2 Milk Co Ltd (A2M), Alkane Resources Ltd (ALK), AVITA Medical Inc (AVH), Bank of Queensland Ltd (BOQ), Clinuvel Pharmaceuticals Ltd (CUV), EML Payments Ltd (EML), Electro Optic Systems Hldgs Ltd (EOS), Flight Centre Travel Group Ltd (FLT), GameStop Corp (GME), Inghams Group Ltd (ING), Mesoblast Ltd (MSB), Metcash Ltd (MTS), Myer Holdings Ltd (MYR), Northern Star Resources Ltd (NST), Resolute Mining Ltd (RSG), Service Stream Ltd (SSM), Tesla Inc (TSLA), Webjet Ltd (WEB), Zip Co Ltd (ZIP)
Travel agent Webjet, seafood producer Tassal Group, biotech play Mesoblast, poultry producer Inghams and skin graft pioneer Avita Medical. These are some of the most shorted stocks in Australia.
According to Morningstar and ASIC data, the list of the 20 most shorted stocks includes eight companies under Morningstar coverage, several of which are undervalued. Among them is wide moat-rated funeral home operator InvoCare, which is trading at a discount of 21 per cent to the Morningstar fair value estimate. So too is the narrow-moat a2 Milk Co, which is trading at a discount of 33 per cent.
The returns for the names on the list are mixed. Dual-listed skin graft company Avita Medical has posted a return of -50 per cent in the past year; more than 8 per cent of its shares are held short. On the other hand, buy now pay later company Zip Co (Z1P) has posted a return of more than 100 per cent; 5 per cent of its shares are held short. Food distribution company Metcash has also drawn short seller interest despite a return in the past year of more than 37 per cent.
For comparison’s sake, short seller interest in GameStop, the company at the centre of the retail trading frenzy last month, stands at more than 88 per cent. For Tesla, the electric vehicle maker, almost 6 per cent of total shares are being shorted.
What is shorting?
Shorting involves trying to manipulate the price of a share upwards to flush out those who are betting that the price will fall. “When someone shorts a stock, they’re trying to sell something that they don’t actually own because they think they can make money later by buying it back at a lower price,” says Morningstar director of investor education Karen Wallace. “Hedge funds do this a lot, but short-selling can be very complicated and risky for individual investors to attempt.”
Those with short interest in a stock are rarely in it for the long haul but are instead often betting on the near-term direction of a stock, says Morningstar regional director of equity research Adam Fleck.
“After all, those shorting a stock need to be cautious, given their return is capped at 100 per cent (the share price) but their loss is potentially unlimited,” Fleck says.
“While looking at short interest in a stock can be an interesting and informative exercise to understand current market sentiment, we focus more on the long-term value of a stock rather than the short-term share price volatility that is inherently tied to shorting.”
MORE ON THIS TOPIC: Investing basics: what is short-selling?
Here are the most shorted stocks in Australia:
Source: Morningstar Direct, data as at 8 February 2021; ASIC, 2 February 2021: *According to dual-listed Avita Medical, there are 66,607,060 ASX-listed CDIs, but there are also 8,303,646 US-listed shares that don’t have CDIs attached to them and aren’t quoted on the ASX, meaning the short interest is actually 5.14% not 8.30%.
Most shorted stocks under Morningstar coverage
Source: Morningstar Direct, data as at 8 February 2021; ASIC, 2 February 2021
Webjet (WEB). The covid downturn has hammered travel stocks, particularly online travel services such as Webjet and Flight Centre (FLT). Short-seller interest in Webjet has risen to more than 13 per cent, and the stock has fallen by almost 45 per cent in the past year. Flight Centre, one of the largest travel agencies in the world, is trading at a 15 per cent discount to the $18 fair value estimate of Morningstar analyst Brian Han. Almost 7 per cent of its shares are held short.
Tassal Group (TGR). Tassal Group is a seafood producer. The company's activities are to farm, process, market, and sell salmon and to procure, process, market and sell other seafood species. The company has come under pressure over fears it could suffer in a protracted trade war with China. It has posted a return of -16 per cent in the past year.
Mesoblast (MSB). Short-seller interest in the stem-cell biotech has increased because of mixed results of the company’s heart failure drug. Its share price also suffered after it was forced to halt a trial of a covid treatment.
Inghams (ING). Almost 9 per cent of shares in Inghams, the largest vertically integrated poultry producer in Australia and New Zealand, are held short. Like InvoCare, the company faces near-term challenges partly because of covid. Coronavirus safety measures have increased costs, and government-imposed shutdowns shifted demand from out-of-home (cafes, restaurants, etc) to retail (mostly supermarkets), creating inefficiencies and negative mix shift as the firm was forced to pivot production. “We assume margins are less favourable in the retail segment, which is heavily exposed to supermarket giants Coles and Woolworths,” says Morningstar analyst Angus Hewitt. “Poultry producers initially struggled to keep up with panic-buying and pantry stocking in March and April 2020, but this sales momentum was not maintained, and the poultry industry entered fiscal 2021 in oversupply. However, industry oversupply appears to be abating and Hewitt expects poultry demand to remain robust over the long term.”
Avita Medical (AVH). Avita is a single product company, the RECELL system, an innovative burn treatment device which creates Spray-on Skin from a small skin sample within 30 minutes thus avoiding or reducing the need for skin grafts. Listed in Australia and the US, the company carries high uncertainty given it is still burning through cash and yet to make a profit, says Morningstar analyst Shane Ponraj. “The company reported US$60 million cash on hand and no debt as of 31 December 2020, and we do not anticipate it requiring additional capital before becoming profitable from fiscal 2023,” Ponraj says. “However, there is the risk of dilution should the company require to raise capital, and while the applications for its RECELL system are promising for paediatric use, vitiligo treatment, and soft-tissue reconstruction, its use is currently limited to adult burn wounds.”
Avita continues to screen as undervalued. Ponraj says the RECELL system has a high likelihood of replacing skin grafts as the standard of care for burn wounds, and the latest trading update of ongoing market share gains in the quarter ending December 2020 affirms his longer-run expectations of the product potential. “In addition to RECELL’s ease of use and clinical outcomes, we expect its reduction in both hospital duration and treatment costs will accelerate adoption amid a stretched US healthcare system.”
Short interest in AVH grew steadily over 2020 from 0.9 per cent (shorts/total shares) in late January to a high of 10.06 per cent (shorts/total shares) by the end of November.
Short history of the 5 current most shorted stocks
% of total shares in issue reported as short positions, 2020
Data source: ASIC
A2Milk (A2M). Founded in 2000, the A2 Milk Company is a New Zealand licensor and marketer of fresh milk, infant formula, and other dairy products that lack the A1 beta-casein protein. “For a2 in particular, there are near-term questions and concerns related to the timing and magnitude of the company’s infant-formula sales rebound in China due to recent COVID-19 disruptions to its go-to-market channels,” says Morningstar regional director of equity research Adam Fleck. “These issues will likely lead to challenging revenue and earnings performance in fiscal 2021 versus prior years. But we remain confident that a2 still has a long-run opportunity to build upon its solid brand assets and gain further market share in the country, driving substantial earnings growth in 2022 and beyond.”
InvoCare (IVC). InvoCare is the largest funeral, cemetery, and crematorium operator in Australia and New Zealand.Hewitt likes InvoCare’s strong competitive position and dominant market share in the death care industry. At current prices, the company presents compelling value. But the near-term outlook for InvoCare is challenged. Social distancing and the hygiene crackdown have led to a virtually non-existent flu season and much lower mortality rates in calendar 2020. Limits on attendance at funerals have restricted InvoCare’s ability to offer its full range of services – demand for higher-margin, premium services has declined amid restrictions in favour of lower-cost services with streaming capabilities. “This is all weighing on earnings and (we expect) sentiment,” Hewitt says. “However, we prefer to focus on the long term, and we expect the number of deaths to grow at an average compound annual growth rate of around 2 per cent per year for the next decade, accelerating beyond 2030.”
Myer Holdings (MYR). Myer is Australia's largest department store operator, with some 60 stores that are mostly spread across eastern states.Myer’s share price has bounced by over 200 per cent from its lows in March 2020, when balance sheet woes were at the top of investor’s minds. “We sympathised with the market’s view that Myer’s future was highly uncertain as it entered hibernation mode with the closure of its physical stores,” says Morningstar retail analyst Johannes Faul. “But we expected the firm to survive the turmoil. Short positions in Myer, an indicator of short sellers’ pessimism toward the stock, have dropped significantly. According to the ASIC, some 7 per cent of Myer shares were sold short at the beginning of February 2021, still amongst the most shorted names on the ASX, but a far cry from the 15 per cent shorted in May 2020.”
What should you do?
Speculation can be intellectually stimulating—not to mention exciting—but it is however fraught with danger, Morningstar behavioural researcher Sarah Newcomb notes.
“Put simply, a group of investors got organized and found a few companies whose price they could manipulate if they acted en masse to create a microbubble, if you will. Playing the game of price arbitrage is, in this context, both legal and fun, but it is also based largely on speculation about human behaviour, not underlying value.
“Wise investors will see it for what it is: a temporary price adjustment based on nonfundamental factors. Speculation is fun. It's why a lot of people love investing, and if you speculate with only money you can afford to lose, events like these can be exciting and sometimes profitable. Still, if you are new to investing, don't understand the difference between fundamental value and market price, or you are considering putting money on the line that you need for your present or future security: stop, breathe, and walk away. No crowd of anonymous Redditors deserves your life savings, period,” she says.
And for those thinking about a potential “short-squeeze” in these stocks, akin to what we saw with GameStop and other stocks in the US, consider this observation from Fleck.
“GME was around 140 per cent short—multiples of the short interest we see in the Australian market, and other targeted names still have a much higher amount of outstanding shares short (as viewable here). We’re unlikely to see a similar massive bounce in Australian shares as a result, in my opinion.”