Most investors will just buy stock they don’t own and sell the stock they do own.

This investment strategy works well if the stock goes up and you can buy low and sell high. If the stock goes down all this strategy offers is selling out.

But some investors, hoping to profit from market downturns, engage in short-selling. This involves borrowing stock then selling it, anticipating the price will fall and then buying it at a lower price.

If they buy it at the lower price they will pocket the difference between the price they sold and the price they bought at. Essentially they are betting the price will fall.

While this is legal under Australian law, it can only happen when there’s offsetting ownership of the shares. But even where it is legal not many brokers offer this due to the enhanced reporting requirements.

You don’t have to be short-selling for the practice to still be useful, because it can be useful to know if your stock is being shorted.

So, who’s betting your stock will fall? Stockhead has delved into short-selling data and found what short-sellers are betting against right now.

Short interest

Short interest is where short selling has not been closed out, meaning the selling has occurred but the buying has not.

While this does show pessimism towards a stock, it may not be correct and there’s no telling whether or not traders believe it’ll be a temporary fall or a permanent decline.

Neither can you tell whether or not trading has anything to do with the company fundamentals or they think the “long” traders (typical buyers and sellers) are sending the price higher than it should be.

For instance, a stock may be profitable but have a price/earnings ratio exceptionally high generally or compared to the industry.

According to Bloomberg the average price/earnings ratio for the entire ASX is 32, meaning the average stock has a share price 32 times higher than earnings per share (EPS).

If short-sellers see a stock has a price/earnings ratio above that, they may short sell in the belief that when the next dividend comes around the long investors may realise they’re not getting a higher yield.

No matter what the dividend is per share it’s a pretty low yield when you’ve paid 100 times that amount. Theoretically they will sell out of the stock, allowing the short sellers to profit.

One metric of how shorted a stock is, is short interest as a percentage of the free float. Free float alludes to the amount of shares held by the public, with no restrictions on transactions.

Shares held by insiders that are restricted (such as by directors or escrowed shares) are not counted. Theoretically the lower the free float, the more volatile a stock should be.

There are 10 ASX small caps with short interest as a percentage of the free float above 5 per cent.

Three of them are above 10 per cent. These are Wagners (ASX: WGN), BWX (ASX: BWX) and Syrah Resources (ASX: SYR).

The highest stock, Syrah, is another that has been heavily backed by brokers including Credit Suisse and Macquarie. It has graphite operations in Mozambique and is at off-take stage. But 16.6 per cent of its free float shares are held by investors betting the company’s price will fall.

One of the most surprising stocks to appear on the list was Queensland gas explorer Senex Energy (ASX: SXY). No other ASX small cap has received as much analyst coverage in recent months.

While the majority of analysts have rated them as a buy, JP Morgan were less bullish and it seems over 5 per cent of its free float holders have been giving more attention to the latter.

Code Name SI as % of Free Float Market Cap Price (3 June)
WGN WAGNERS HOLDING CO LTD 10.62% $307.42M 1.9
BWX BWX LTD 13.72% $205.63M 1.65
SYR SYRAH RESOURCES LTD 16.55% $456.44M 1.33
LNG LIQUEFIED NATURAL GAS LTD 5.09% $174.40M 0.31
MRM MMA OFFSHORE LTD 5.12% $167.33M 0.19
SXY SENEX ENERGY LTD 5.44% $450.43M 0.31
CLH COLLECTION HOUSE LTD 5.76% $174.10M 1.25
KAR KAROON ENERGY LTD 5.82% $220.36M 0.89
MLX METALS X LTD 6.53% $161.93M 0.23
CLQ CLEAN TEQ HOLDINGS LTD 8.07% $205.28M 0.28

See it like it is

Alternatively you may choose to look at the literal short interest figure. Stockhead analysis has 16 ASX small caps with over $10 million in short interest.

A handful of stocks on Stockhead’s previous table appeared again including Syrah and Senex.

But there were some new stocks on this list, many of whom had been in decline for several months. The largest being Africa-focused oil and gas stock FAR (ASX: FAR), with $95 million in short interest.

Since late October oil prices have been in free-fall and their shares have followed suit, going from 14 cents to 5.5 cents.

Another notable stock was Clean Teq Holdings (ASX: CLQ) that has been in free-fall for several months. The short interest betting it will continue currently stands at $38 million.

Code Name Price (3 June) Market Cap Short Interest
KAR KAROON ENERGY LTD 0.89 $220.36M $11.19M
SEA SUNDANCE ENERGY AUSTRALIA LTD 0.36 $247.49M $13.00M
PDN PALADIN ENERGY LTD 0.12 $210.25M $14.11M
ECX ECLIPX GROUP LTD 1.12 $357.99M $14.28M
BWX BWX LTD 1.65 $205.63M $14.80M
EWC ENERGY WORLD CORP LTD 0.06 $107.74M $15.27M
NCZ NEW CENTURY RESOURCES LTD 0.69 $351.48M $15.81M
LNG LIQUEFIED NATURAL GAS LTD 0.31 $174.40M $27.64M
AJM ALTURA MINING LTD 0.1 $223.17M $31.69M
MRM MMA OFFSHORE LTD 0.19 $167.33M $31.71M
MLX METALS X LTD 0.23 $161.93M $36.00M
INR IONEER LTD 0.17 $250.75M $37.25M
CLQ CLEAN TEQ HOLDINGS LTD 0.28 $205.28M $37.66M
SYR SYRAH RESOURCES LTD 1.33 $456.44M $55.46M
SXY SENEX ENERGY LTD 0.31 $450.43M $74.88M
FAR FAR LTD 0.06 $357.98M $95.29M