Possible shorting opportunities for May/June

With upcoming confessions season in the US, together with Federal Budget announcements and the UK Brexit adding to an already challenging macro-economic backdrop for equity markets, the May/June period could present some added pickings for those with an appetite for short-selling.

While it's not for the faint hearted, short-selling – the fine art of borrowing shares to sell them, with the hopes of the price falling and being able to buy them back at a lower price – is common practise, and contrary to popular opinion, it isn't solely confined to value-traps or share market basket-cases.

The top 20 shorted stocks on the ASX (see table) includes the 'alpha and omega' of listed companies from investment grade, growth stocks like JB Hi-Fi (ASX: JBH), Monadelphous (ASX: MND), Flight Centre (ASX: FLT), through to battlers like Metcash (ASX: MTS) and Woolworths (ASX: WOW).

However, as diverse as these stocks are, what they all share is a market perception that they could be exposed to greater levels of short-term risk than other stocks.

But remember, a short position on better quality stocks doesn't automatically mean its business performance will deteriorate. For example, a growth stock might simply look overheated on valuation measures, and be exposed to short-term challenges – with profit takers simply outweighing buyers.

We saw this early in 2016 when short sellers rode the fall of stellar performing Blackmores (ASX: BKL) which was sold-off by profit-takers who locked-in their gains at $220.90 which drove the price back down to $168 six weeks later.

Overheated growth stocks aside, there are also stocks that might be exposed to myriad threats from commodity price risk, new-entrant disrupters, through to low consumer confidence, that spooks the market into selling.

 

This list could provide some valuable clues into emerging value-traps to steer clear of, and Metcash and Woolworths clearly two stocks to be extremely wary of going forward.

So it's important to note that (most) short sellers are simply riding the underlying momentum within share market sentiment rather than creating it.

The trick is to find stocks where the opportunity for shorting is still flying under the radar of the broader market. There's no shortage of data on the ASX's most shorted stocks, and http://www.asx.com.au/data/shortsell.txt is a good place to start.

While this data is no definitive guide to what will happen on the market today, the top twenty short positions on the Australian Stock Exchange (ASX) will give you a pretty good idea of which companies are on the radar of those people who specialise in making money on falling share prices. 

While there's no guarantee stocks that reaches new 52-week highs won't move higher, any sign that they're overheating on valuation measures could signal underlying share price weakness, and this is where shorting experts will combine fundamentals with charting to help predict the direction in which the share price is heading.

 

Seven possible shorting opportunities

 

Here are seven companies that have recently hit fresh 52-week highs – having delivered shareholders with double-digit returns in 2016 – that could throw up some shorting opportunities.

1)          Amcor Limited's (ASX: AMC) hit a new 52-week high of $16.07.

Brambles Limited (ASX: BXB) recently reached a new 52-week high of $13.14.

JB Hi-Fi Limited (ASX: JBH) recently hit a new all-time high of $24.61.

Sydney Airport Holdings Ltd (ASX: SYD) recently hit a new high of $7.30.

Transurban Group (ASX: TCL) recently touched a high of $12.48.

Treasury Wine Estate Ltd (ASX: TWE) climbed to an all-time high of $10.32.

Corporate Travel Management Ltd (ASX: CTD) hit an all-time high of $15.73.

While share markets can and do behave contrary to what the fundamentals might be telling it, a useful guide to how overheated a stock looks is valuation measures.

In other words, don't be too surprised if stocks trading at significant premiums to intrinsic value (IV) and its target price encourage sellers to lock-in gains which places downward pressure on the stock.

One useful example, is Corporate Travel which following a liner share price rise since early February is now trading close to its high-end target price of $16 and at a 65% premium to its intrinsic value.

Based on an ASIC filing, 5.3% of Corporate Travel's outstanding stock short sold as at May 5. It's very likely that the recent sharp share price rises is the result of short sellers closing out positions at a loss.

It's more than likely that short sellers have been targeting the stock on valuation grounds, or in the belief that the acquisitive growth is unsustainable. But if it can achieve guidance, with potential to grow at double-digit rates over the next five years, this short selling could prove unwarranted.

First principles for shorting stocks

Before you short a stock, keep the potential pitfalls in mind and have rules for both when to get into and when to get out of the trade. Here are some basic principles to follow.

• Stick to bear or down markets: The vast majority of stocks move in the same direction as the general market, so it makes sense to restrict your short selling to bear markets or clear downtrends.

• Concentrate on previous market movers: Early within a stock's upcycle is typically not a good time to be shorting, unless there's an unforeseen market correction, and this is where it's useful to combine stock fundamentals with technicals ~ aka charting.

• Only short highly liquid stocks: Ideally, when it comes to shorting, you want to focus on stocks with much higher, institutional-quality liquidity to reduce more volatile swings, up or down.

• Look for signs of a definitive break in the stock: When shorting, look for a sharp breakdown or clear change in trend. As a general rule, short sellers tend to take note of what head-and-shoulders pattern are telling them.

• Strategically plan profit-taking: Just as you shouldn't buy a stock without having a selling strategy, also make sure you have a plan for when to cover a short sale trade.

TOP SHORTED STOCKS

MTS

METCASH LIMITED ORDINARY

17.13%

MYR

MYER HOLDINGS LTD ORDINARY

14.43%

WOR

WORLEYPARSONS LTD ORDINARY

14.38%

FLT

FLIGHT CENTRE TRAVEL ORDINARY

11.47%

ORI

ORICA LIMITED ORDINARY

10.94%

MND

MONADELPHOUS GROUP ORDINARY

10.35%

PRY

PRIMARY HEALTH CARE ORDINARY

10.15%

CAB

CABCHARGE AUSTRALIA ORDINARY

9.22%

AWC

ALUMINA LIMITED ORDINARY

9.15%

JBH

JB HI-FI LIMITED ORDINARY

9.10%

BAL

BELLAMY'S AUSTRALIA ORDINARY

8.58%

WSA

WESTERN AREAS LTD ORDINARY

8.47%

AWE

AWE LIMITED ORDINARY

8.36%

WOW

WOOLWORTHS LIMITED ORDINARY

8.20%

GUD

G.U.D. HOLDINGS ORDINARY

8.02%

IGO

INDEPENDENCE GROUP ORDINARY

7.80%

AAC

AUSTRALIAN AGRICULT. ORDINARY

7.75%

SHV

SELECT HARVESTS ORDINARY

7.41%

IVC

INVOCARE LIMITED ORDINARY

7.27%

RFG

RETAIL FOOD GROUP ORDINARY

6.96%

Data: 05/05/2016 Source ASIC