Lithium miner Orocobre is now the most shorted stock on the ASX, having taken over from Myer and Aconex in the past few weeks.
The increased shorting of Orocobre came AFTER the stock fell from $4.80 to $2.70 in February. Aconex was the most heavily shorted stock in January (17% of its capital was short), after which it fell from $5 to $3, so someone did well.
To remind you: short selling is where a speculator profits from the decline in a share price by selling first and then buying later. If the stock falls, you buy at a cheaper price than you sold.
But it doesn’t always work, and you can’t always rely on the most shorted stocks to go down – despite Gerry Harvey’s fury on the subject.
For example, Glaucus Research, the openly shorting hedge fund we interviewed last year, has done well with Qintis (formerly TFS), causing a 30% drop in the share price with its zero valuation report last week, but with former CEO Frank Wilson apparently working on a takeover bid, I’d say Glaucus needs to get its chips off the table fast.
More to the point, all the shorts in Myer got squeezed by Solomon Lew’s $100 million play, which sent the price up 20%. Brutal.
Aconex has been a very profitable short since mid-last year, when the PE was above 60 times and clearly pricing in more growth than could ever be delivered.
With the price back around $4, it looks to have bottomed. The company’s pricing remains strong and it’s approaching critical mass on a global scale, where business becomes self-generating, leading to lower marketing costs.
With a PE of 30 times now, the stock is unlikely to double in the near term, but anyone looking for another leg down will probably be disappointed.
As for Myer and Qintis in future, who knows? It doesn’t sound like Solly Lew is going to bid for Myer, but his influence can only be beneficial, and goodness knows what Frank Wilson is up to.
And Orocobre? I’ve got a bid in to interview CEO Richard Seville in the next week or two, so we’ll find out more then.
The Constant Investor is the new home of Alan Kohler, founder of Eureka Report and the ABC's finance presenter. Join to receive - Kohler's Weekly Overview, exclusive stock tips, investment ideas, podcasts and much more. Click here to learn more.