Which Shorted Stocks Might Be Good Value?

FYI | Oct 25 2017

By Peter Switzer, Switzer Super Report
 

What lies above is the table that we show to you each Saturday — the most shorted stocks [Extended table available in the weekly FNArena Short Report]. However, many of these have done well in recent weeks, with Domino’s Pizza being a case in point, rising 12% over the past month.

Now given we have just broken out of the sideways trap that has persisted since April this year and Trump tax talk continues to excite Wall Street, we could see some short-sellers in trouble in the coming weeks, which will force them to get out of their positions, inevitably pushing up the stock prices of those they wrongly have taken a set against.

Of course, they could be right with some companies but if a rising tide situation increases the chances of all ‘boats/stocks’ rising, then it could be bad news for shorters and great news for buy and hold brigade.

If November remains positive for Wall Street and President Trump gets closer to a tax cut package that passes Congress, then we could have a Schwarzenegger Santa Claus rally on steroids. If we can’t beat 6000 on the S&P/ASX 200 Index, under those circumstances I’d have to hand in my tipping qualifications!

So let’s assume the market is set for some positive momentum, given this is historically the best quarter for stocks, and let’s assume Trump’s tax changes proceed, then what shorted stocks might put short-sellers under pressure?

The most shorted stock is Syrah Resources (19.39%) but FNArena’s team of analysts/experts say their target price is $4.52. And that’s a 21.8% potential upside, given it finished Friday at $3.71.

Independence Group (IGO — 18.26% shorted) has a target price of $3.65 but is currently $4.32, so the potential downside is 15.5%.

Domino’s Pizza (DMP — 15.17% shorted) currently sells for $49.50 but the target price is $46.85 so that’s a potential loss of 5.4%. Remember, this stock has risen 12% in the past month, so I should have written this story four weeks ago! Sorry.

JB Hi-Fi (JBH) has 14.7% of its stock shorted with its current price $23.87 and a target of $24.52, so that’s a potential rise of 2.7%. This company is clearly under the black cloud of Amazon but I reckon they will surprise their doubters.

The next cab off the shorted rank is Healthscope (HSO — 12.99% shorted). This constant disappointment ended trade on Friday at $1.87 but the experts think it’s going to be a $2.13 stock, so that’s a 13.7% upside ahead if they’re right. Of course, they have been wrong before buy this company has to eventually get it right, though I write that without much conviction. I will be testing HSO on my TV show in coming weeks.

Western Areas (WSA) has 12.89% of its stock shorted and sold on Friday for $3.04 but the target price is $2.52, which means it could face a 17.2% downside.

Retail Food Group (RFG – 12.89% shorted) has snuck up in recent weeks so it only has a 1.6% upside, with its current share price at $4.48, while the target is $4.55.

Orocobre (ORE — 12.75%) sold for $4.85 on Friday and its target price is $4.59, so that’s a 5.5% downside predicted.

It won’t surprise you to learn that Myer (MYR) is shorted to the tune of 12.21% and its latest share price was $0.74 but unsurprisingly the experts price it going forward at $0.69, which would be a 7.9% drop. This implies it needs a Solly Lew big play or it will remain a market pariah.

Galaxy Resources (GXY  — 11.29% shorted) finished trade at $3.78 on Friday, while the target price is $3.38, which implies a 10.7% drop could be ahead.

Aconex (ACX — 10.77% shorted) is a real up and down stock and I’m told by many experts that it’s a great company but its target share price is $4.80. That’s an 11.4% downside.

The next one is a company I like but the shorters have me doubting my instincts. I’m talking about APN Outdoor (APO), with 10.76% of its stocks shorted. Unfortunately, FNArena doesn’t have a target price for the stock [Yes we do, ticker code APO, $5.29 implying 17.5% upside. The writer had used the wrong ticker.] but given the future of outdoor advertising, this is another company I will look into in coming weeks.

Select Harvest or SHV has 10.39% of its stock shorted. Its current price is $4.85 while the experts tag it at $4.57, so they’re expecting a 5.8% slide.

The shorters’ public enemy number one is Gerry Harvey, who calls them “criminals” and his Harvey Norman or HVN stock is shorted up to 10.33% of his total stock. The last share price I saw was $3.96, while the analysts tip it will see $4.14, suggesting there could be a 4.5% upside. But with a dividend likely to be 5-6%, it looks like an interesting play, if HVN is not decimated by Amazon, which I don’t expect. That said, all retail plays pre-Amazon are in the speculative basket so what you’re betting against is how well the US retailer will do here in the short-term.

Metcash (MTS) has 9.97% of its stock shorted. While it now sells for $2.63, the target price is $2.41, which means an 8.6% slide is expected. It kind of makes sense, given the battle Coles and Woolies are wagering, where price-cutting is a seriously important weapon!

The next company, Mayne Pharma (MYX) is another let-down merchant. It has 8.67% of its stock shorted but the following revelation is extraordinary! The Friday share price was $0.70 but its target price is, wait for it, $1.16. And if these professional company watchers are right, that will be a 64% rebound! This company was a darling until it started disappointing the market but there are those out there who see it has more potential than what the market is currently saying.

Rio Tinto (RIO) has 8.6% of its stock shorted and its last price was $69.17, while the target is $75.69, so the experts see a 9.4% rise in the future.

Quintis (QIN) finds 8.26% of its stock shorted. Its most current share price is $0.29 cents but FN Arena doesn’t have a target price for this company, which always seems to be in a spot of bother. It’s for the punters but I have no tips.

Flight Centre (FLT) has 8.08% of its stock shorted. The current price is $46.94 but the target price is $44.80, which is a potential 4.6% drop. I’ve always found FLT to be a stock to buy on the dips. The founder Graham Turner has a happy knack of coming up with a big play, when the market puts on a hate session on the company.

Vocus Communications or VOC has 7.39% of its stock shorted but telcos worry me. I don’t fully understand their threats but the market has really clobbered this sector recently. The last price I spotted was $2.82 but the target price came in at $2.68, which means a 5% fall is expected.

So, what shorted stocks look like reasonable bets? And remember, if the shorters get these companies’ futures wrong, there will be a short-squeeze, which will take the share prices a lot higher.

Those with notable upside include:

  • Healthscope
  • Mayne Pharma
  • Rio Tinto.

Those where the drop in share price is small and could benefit from a ‘rising tide’ include:

  • Domino’s
  • JB Hi-Fi
  • Harvey Norman
  • Retail Food Group
  • Flight Centre.

The stock market this week will decide if it can kiss goodbye the sideways trap we’ve operated in for most of this year. However, if it’s not this week, before year’s end we should see an uplift in confidence and a number of these shorted stocks, along with their company leaders, will have the last laugh over the shorters and a sizeable spike in their share prices.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms