Short & Caught: Here’s why it’s worth watching a stock’s ‘short interest ratio’
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Short & Caught is Stockhead’s fortnightly recap of which ASX small cap stocks are heavily shorted. Stocks that are shorted have investors betting that they fall.
Shorting works by “selling” stocks you do not actually own in the hope of buying it back at a lower price.
Because shorting is restricted under Australian law, any substantial shorting of stocks is worth knowing about even if you own these stocks and only trade “long”.
This week Stockhead decided to observe a new short interest metric known as the short interest ratio. It is calculated by dividing the volume of shares shorted by its average daily trading volume. The higher the ratio, the higher it is being shorted.
The ratio measures how many days it would take for all the shares being shorted to be traded at current volumes. While indeed a stock may be shown as shorted more than it is if the stock has a low trading volume or a low short interest figure.
Yet, investors have gone to the step of betting they will fall so we believe it is worth knowing about, particularly considering a number of new stocks appeared when we delved into this metric.
The stock with the highest ratio was lighting retailer Beacon Lighting (ASX: BLX) with a ratio of 191.
As fundamental a need as lighting can be, it is difficult for retailers to stand out. This is particularly true for firms which are undergoing transformations. Beacon anticipates a cut in pre-tax earnings from $33 million to $28.5-$30.5 million.
Speedcast (ASX:SDA) shows downgrades, even while remaining profitable, can send stocks plunging and investors are betting it will continue.
Natural beauty stock BWX (ASX: BWX) has appeared for some weeks as a stock with high short interest. It has gained 40 per cent in the last five weeks with the only news being an extension of its debt facility.
The retail industry has on one hand success stories such as City Chic Collective (ASX: CCX), to decliners such as Myer (ASX: MYR). With a ratio of 71, it’s clear investors think it will join the latter category.
Third is LNG play Energy World Corp (ASX: EWC) with a ratio of 64 and short interest of $16.4 million. On one hand it would be surprising that an LNG stock would make the list due to the state of Australia’s LNG market.
On the other, it is in Indonesia a market with cut-throat competition among smaller producers and even the bigger producers struggling. Shell is divesting from the Abadi project and while Shell said it was to fund the BG acquisition, construction has been substantially delayed due to regulation.
Infrastructure stock Cardno (ASX: CDD) was also on the list with a ratio of 48 in spite of strong earnings figures.
But for some investors, just looking at a stock’s short interest figures before considering any ratios can be insightful.
The top three shorted stocks have been shorted for some weeks, Myer (ASX: MYR), Syrah Resources (ASX: SYR) and Far (ASX: FAR) for implicit reasons we’ve covered before.
Namely, the struggles of the once dominant retailer, the uncertain state of the African graphite market and the stagnation of oil prices in 2019 potentially resulting in the sale of its project respectively.
Among new entrants was lithium miner Altura Mining (ASX: AJM) with $34 million in short interest. In the last fortnight it announced off-take agreements with a Chinese supplier.
But its share price failed to take off. It seems investors are more enthusiastic about commodities that are in demand today (such as iron ore) rather than tomorrow.