Around this time last year we covered the most shorted companies on the ASX. At the time, basic materials and energy companies dominated the list. Fast forward to today and it’s a whole new ball game.

Consumer cyclical companies (non-essential retail) now make up 30% of the list. Short positions in industrials and healthcare have also notably increased in the past year. There are eight companies which have remained on the list over the past year and twelve new additions.

Assessing the most shorted companies can be valuable in determining ‘who’ short sellers are betting against. Importantly, this is not an indicator whether a share will succeed or fail. Analysing short positions only gives investors one piece to a much larger puzzle.

Understanding why short sellers are targeting these names requires looking at each company in detail. But first, let’s do a brief refresher on shorting.

An easy analogy for shorting

Shorting can be a confusing concept. This is where analogies can help. I recall the ‘iPhone’ analogy from a university lecture that explained how shorting works.

Let’s say your friend has a spare iPhone 17 that they let you borrow. After lending you the phone, you hear news on the release of the iPhone 18. From experience, you expect the iPhone 17 to become less valuable following the release. You decide to sell the borrowed iPhone 17 now and receive cash. As predicted, the new model is released and the iPhone 17 is now retailing for much cheaper. You use the cash from your original sale and buy back the iPhone 17 - with some profit leftover. You return the iPhone 17 to your friend and they are none the wiser.

While this analogy is morally questionable, it explains how shorting works. Shorting is simply a way to profit from a stock falling. Investors and institutions will take a short position when they believe the share price will fall in the future. They will borrow shares from brokers (for a fee) and sell the shares which they receive cash for.

In the future, they use the cash to buy back the shares and return the shares to the broker. The short position makes profit if the share price falls but can also lose if the share price increases. The potential losses tied to shorting is theoretically unlimited. This is because the share price can rise indefinitely but can only fall to zero. That is why institutions will constantly monitor their short positions to avoid getting ‘squeezed’.

With a decent grasp on how shorting works, let’s review our list of the most shorted ASX companies and pick three to explain the underlying mechanisms driving such strong short interest.

Top 20 most shorted ASX companies

Domino’s Pizza (ASX.DMP)

  • Fair Value Estimate: $41 (60% discount at 30 March)
  • Rating: ★★★★★
  • Moat: Narrow

Domino’s (ASX.DMP) is one of eight companies that have remained on the most shorted list year on year. The shares have fallen over 80% since its COVID peak and 34% over the past 12 months. More recently, shares fell 11% following the company’s February earnings result. The fast food chain saw a slight decline in sales although profits were steady. The bear argument is that the company faces execution risks in international markets and rising competition. This alongside a recent leadership overhaul are key reasons why short sellers are continuing to take interest in Domino’s.

Investors have long questioned Domino’s ability to sustain growth across its domestic and international chains. Our analyst Johannes Faul still sees room for growth in stores in Australia and Europe. In particular, Europe still has room to grow store footprint by 60% to 2,200 outlets in the next decade. Johannes has a fair value of $41 which is underpinned by Domino’s long term growth story.

Guzman Y Gomez (ASX.GYG)

  • Fair Value Estimate: $16 (3% premium at 30 March)
  • Rating: ★★★
  • Moat: None

Guzman (ASX.GYG) is a new addition to the most shorted list. Market pessimism on the growth story of Guzman Y Gomez has reached new highs. The shares are down 43% since its listing in 2024. Following the company’s February result, the shares fell 13.9%. The high level of shorting has acted as an accelerant for share price volatility. The bear case for Guzman cites concerns about widening losses in the US. This has been a point of contention since its IPO.

Despite this, Guzman has consistently delivered strong top line numbers in Australia. In fact, the Australian restaurant economics rival those of KFC and McDonalds. The steep sell off has pushed GYG shares close to our $16 fair value. Johannes notes that while Australian network earnings are growing strongly, like for like sales growth is approaching the broader industry average. Like for like sales comparisons show how fast established stores (12 months running) are organically growing.

However, Johannes reiterates the long term growth runway is still intact. Guzman’s Australian network is forecast to at least double in the next decade, well ahead of Collins Foods (KFC) and Domino’s Pizza. The share price decline has also pushed up the dividend yield to 2.8% fully franked.

Treasury Wine Estates (ASX.TWE)

  • Fair Value Estimate: $8.50 (58% discount at 30 March)
  • Rating: ★★★★★
  • Moat: None

Treasury Wine Estates (ASX.TWE) is a new face on the ASX most shorted list. The shares are down 62% in the past year on the back of sluggish demand in China and the US. In its most recent earnings call, the company reported a 40% fall in profit. The company also took a large impairment on its US assets given luxury wine demand in the US is weak. As a result, Treasury cut its dividend to preserve capital and reduce its debt load. The challenging conditions ahead explain the increased short interest over the past few months.

Our analyst Angus Hewitt current fair value is $8.50 suggesting shares are materially undervalued. Angus notes that a series of negative updates have turned the market overly pessimistic. Destocking will protect brand equity and pricing power for Treasury’s stronger brands such as Penfolds. Despite this, over the next two years Angus expects weak wine demand to be exacerbated by lower shipments.

What is the takeaway?

Short sellers on the ASX have clearly shifted their interest over the past year. Across the board, cyclically tied retail shares have clearly peaked short seller interests as economic conditions impact demand.

While short interest fluctuates over time, the message to investors stays the same. Short seller data alone won’t tell investors who will win or lose. It does highlight where expectations are being tested. Understanding the reasons driving short seller interest allows investors to add more pieces to the investing puzzle.

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