Last Wednesday, the AFR ran an article about shorting on the ASX 200. The expert on shorting who was quoted in the article was Matthew Ross from Goldman Sachs. Matthew Ross is the Managing Director at Goldman Sachs and Head of Portfolio Strategy and Quantitative Research.
Ross states that while short interest in the Australian market has increased sharply this year, it has actually only returned to long-term averages.
He advises that investors wishing to make money from shorting should first identify a basket of stocks with various “red flags” and then either short or, at the very least, avoid investing in these stocks.
The ‘red flags” Ross nominates are weak momentum in earnings and share price, high issuance of new shares, high volatility, low free cash flow, low interest cover, high forecast growth and a high valuation versus history.
He then identifies the ASX stocks with the highest score based on the Goldman methodology.
The fifteen stocks named are NextDC, Mesoblast, Clarity Pharmaceuticals, APA Group, Siteminder, ZipCo, Lifestyle Communities, PolyNovo, Sigma Healthcare, Brickworks, Nufarm, Neuren Pharmaceuticals, Healius, Fletcher Building and Atlas Arteria.
Thus, six of the fifteen stocks (40%) come from the Healthcare sector, whereas Healthcare sector stocks represent just 6% of the S & P ASX 200.
Sure enough, when I checked the “Biggest Losers” list last Friday, three of these six companies identified by Ross were in the Top 5 loser stocks for the day – Clarity, PolyNovo and Neuren.
I will leave the analysis on this one to others!
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