Short sellers bet against lithium, agriculture and discretionary retail
Each Saturday, we publish a list of the 20 most shorted stocks The list is compiled from data released by ASIC that tabulates position reports from short sellers.
Short selling is selling something you don’t own. A short seller profits from a falling price – selling at a higher price first, and then buying back at a lower price.
To short sell a stock (something you don’t own), you need to be able to “borrow” the stock to make the delivery on the ASX. This is where the major fund managers and large superannuation funds come in – they lend the stock to the short sellers. In return, the short seller secures the loan by giving the super fund cash. When the short seller closes the position on the ASX by buying the stock back, he/she returns the stock to the super fund and gets their cash back. The super fund gets paid for lending the stock by taking a margin on the cash.
Broadly, there are four “types” of short sellers:
- The first is a simple outright short sale – “company ABC is a dog of a company” – so the short seller sells ABC.
- Secondly, the relative short sale that involves being “long” one company and being “short” another company in the same sector. Essentially, the short seller is saying that company A will do better than company B. Examples could be buy Woolworths and sell Coles; buy Fortescue and sell Rio. By being long one stock and short the other, the short seller isn’t taking market or industry risk, just relative performance risk.
- The third type is a sector position, where companies from a particular industry or sector are sold because the short seller thinks that there are significant headwinds, or they are over-hyped and over-priced.
- The final type relates to market makers and other professionals hedging derivative positions such as exchange traded options and warrants.
My focus here is on the sector view
It is the third type, the sector view, that I want to focus on, because it tells us there are professionals who feel that certain industry/sectors are either “over-hyped” or vulnerable to the macro-economic environment. That’s not to say that they will be right, but historically, these professionals tend to be right more often than they are wrong otherwise they would be out of business.
Analysing the data, the first conclusion we can draw is that the short sellers are bearish on lithium. This is in part a response to the falling spot price for lithium carbonate price, which on the back of weaker Chinese demand, hit a two-and-a-half-year low last week. The table below shows the relative ranking of some of the major lithium stocks.
Pilbara Minerals is the most shorted stock on the ASX. 11.5% of its ordinary shares, or 34.5 million out of a total of 301 million shares, are sold short. The short position is worth about $140 million. Core Lithium is the sixth most shorted stock on the ASX, with 8.6% of its ordinary shares sold short. Sayona is seventh, Liontown eleventh, Vulcan Energy twenty third, Ioneer is thirty third and Argosy thirty eighth, with 4.4% of its shares sold short. To put these into context, most stocks on the ASX have short positions less than 1%.
Interestingly, the biggest lithium producer, Allkem (AKE), has a relatively small short position of only 1.3%.
The second conclusion is that the short sellers are still bearish on discretionary retailers. While these positions have reduced, they are still material, as the following table shows.
Agriculture stocks and Rare Earths/Battery Materials stocks also feature prominently, as the following tables show:
Where aren’t the short sellers “short”?
Although not as useful as knowing where they are short, there is some value in knowing where they are not actively playing. Short positions in the major stocks are relatively small, with short sellers not particularly active in the major miners or major banks.
Rounding out the major companies, CSL has 0.4% of its share sold short, Woolworths is 0.3%, Telstra is 0.2%, Woodside is 0.6% and Wesfarmers is 1.1%.
