Short sold stocks are potentially subject to extraordinary moves, especially where there is a company specific trigger such as an earnings report.
Each Thursday, on Sky Business (Channel 602 or HD 290) I report on the most short sold stocks. As a panel, we look at the top ten short sold stocks by percentage of shares on issue, and the top ten by the value of the short position.
(For those less familiar with sharemarkets, it is possible to open a trade by selling a stock first, and buying back later. This is an important aspect of the functioning and liquidity of the market. It is a regulated activity - stock must be borrowed to cover the short sold position, and all short selling must be reported to the regulator. In Australia, this is ASIC. The lists are drawn from ASIC's public reporting of the total short positions in all stocks).
The importance of monitoring "the shorts" was demonstrated again during the reporting season. Where a company that is heavily short sold reports well, or better than expected, the share price lift can be exaggerated by a short sellers' scramble to buy back their positions. Woolworths is a good case in point. Although many saw its sales and profit growth as disappointing, the simultaneous announcement of a deal to sell its hardware businesses impressed investors. This $30 billion company leapt 6.7%, and traded up 7.5% in that session, in my view at least partly due to a short squeeze.
The stock to highlight today is Orica, the eight most short sold by percentage, and tenth by value, and the only stock to appear on both lists. Unusually, Orica's financial year ends on September 30, so it won't report until November 4 this year. The mining services sector remains under pressure, and many investors still shun these stocks (Monadelphous and Worley Parsons are also among the most shorted). However, investors considering diversifying into an underheld sub-sector, or traders looking for an asymmetric trade risk profile, may want to mark the date, and considering buying before the announcement.