In the past few months, there’s been a lot of talk about short...

In the past few months, there’s been a lot of talk about short sellers, and although they may represent a possible issue with the company, there is also a risk in believing that short sellers are flawlessly intelligent, all-knowing, and can never be wrong. In fact, they are often incorrect and place themselves in quite difficult situations. Let’s take 14/11/2016, the 10 most shorted companies in the ASX were: Myer Holdings (17.5%), Western Areas (14%), Worleyparsons (13.8%), Bellamy’s Australia (11.8%), Aconex (11.1%), Nine Entertainment Co Holdings (11.1%), Metcash (10.8%), Monadelphous Group (10.3%), Alumina (9.8%), and G8 Education (9.5%).

We’ll compare the price when the short interest had been held (14/11/2016), with 18 months later at (14/05/18).

Myer Holdings: At 14/11/16, closing price was $1.19. 18 months later, $0.45. Loss of 62%.

Western Areas: At 14/11/16, closing price was $3.08. 18 months later, $3.41. Gain of 11%

Worleyparsons: At 14/11/16, closing price was $8.175. 18 months later, $16.75. Gain of 105%

Bellamy’s Australia: At 14/11/16, closing price was $10.99. 18 months later, $19.12. Gain of 74%

Aconex: At 13/12/16, closing price was $4.35. At 29/03/18 it was $7.79. Gain of 79%

Nine Entertainment Co Holdings: At 14/11/16, closing price was $0.895. 18 months later, $2.35. Gain of 163%*

Metcash: At 14/11/16, closing price was $1.895. 18 months later, $3.43. Gain of 81%

Monadelphous Group: At 14/11/16, closing price was $10.11. 18 months later, $16.23. Gain of 61%

Alumina: At 14/11/16, closing price was $1.70. 18 months later, $2.75. Gain of 62%

G8 Education: At 14/11/16, closing price was $3.20. 18 months later, $2.60. Loss of 19%

*Example: A short seller borrowed 11,173,185 shares from a bank that owned shares in Nine Entertainment when the price was $0.895 (Value of approx. $10million). They will sell these shares and will have $10million in their hands. They want the price to go down, so they can buy the same number of shares (11,173,185 shares) for a lower price, and keep the difference. However, if their desired price never comes around and they’re left without the shares that belong to the bank, they may have to throw in the towel and say “this company may never fall”, and decide to sell on 14/05/18. To get 11,173,185 shares back, they now have to buy it for the new price of $2.35. Meaning that he will have to pay a total of $26,256,984.75 (a loss of $16,256,984.75).

I’d be cautious of letting the presence of short seller dictate my choices on which companies to invest in, but unfortunately the presence of short sellers is enough to introduce doubt & fear into many investor’s strategies/plans. It may be that in the ASX world, to accuse is to lose, even if you’re innocent & have provided evidence to prove it. The companies subject to short selling could be terrific, though short sellers enjoy throwing in curve balls.