What are the ASX stocks vulnerable to a ‘short squeeze’?

Could the ASX become subject to the same trading shenanigans in the US which put a rocket up the share price of struggling video outlet operator GameStop and then the silver market.

It’s certainly food for short … er, thought.

This month shares in online travel agent Webjet (ASX: WEB) have climbed around 10% as online trading communities seek to replicate the “short squeeze” that pushed GameStop’s stock up from less than US$20 a share in mid-January to a dizzying US$347.51 on the 27 January.

It’s no coincidence that Webjet is the most short-sold stock on the ASX, having borne the brunt of the travel sector’s ongoing virus-related misery.

For those still straggling back from the beach, the buying in GameStop was orchestrated by small retail investors on the social networking site Reddit, who noted the huge shorting activity in the stock and suggested investors avail of the low price.

They did – in droves – before broking sites such as Robinhood restricted trading in the stock.

Locally, some confused investors even bought into nickel play GME Resources (ASX: GME), which shares the same ticker code as the New York Stock Exchange listed GameStop.

Shorting selling a stock

In the shorting game, short sellers take a punt on the share price falling, rather than increasing (as is the case with traditional long investing).

They operate by “borrowing” shares from another party – usually an institution – for a fee and then selling the targeted stock.

If the shares decline as expected, the “shorter” buys back the shares at a lower price and returned them to the lender (which critics equate to borrowing a friend’s car in return for a carton of beer and then returning it completely trashed).

Rather cleverly – and quite accurately – the brains organising the retail posse reasoned that if GameStop’s share price rose sharply, the shorters would have to put a stop to their losses and purchase shares to return to the lender, thus accentuated the upward share movement.

Unlike a long investor who can lose a maximum 100% of their capital, a short seller’s losses are theoretically limitless.

In Australia, punters on sites such as Hot Copper have envisaged a similar co-ordinated buying approach, targeting the most shorted ASX shares.

But as with the US, moves are afoot to curtail this activity, dubbed the “revenge of the retailers” against the giant hedge (short selling) fund.

Moderators at online Reddit community ASX Bets – an Australian counterpart to Reddit owner WallStreetBets – announced posts would be deleted and users banned that called for coordinated market plays.

The fear is that the share gains cannot be sustained and will collapse like a Ponzi scheme, leaving these retail warriors sore and sorry rather than feeling like David who had just knocked off Goliath.

At last glance, GameStop shares traded at US$51, well off their peak of US$395 and pretty much back to the late January level when the ballyhoo began.

What are our most shorted stocks?

According to the venerable Shortman.com.au, as of early this week, Webjet had just over 13% of its shares shorted.

This was followed by salmon producer Tassal (ASX: TGR) which was shorted 12%; Northern Star Resources (ASX: NST) by 10.8%; Speedcast International (ASX: SDA) 9%; Mesoblast (ASX: MSB) 10%; Inghams (ASX: ING) 8%; Western Areas (ASX: WSA) 8%; Avita Medical (ASX: AVH) 8%; Metcash (ASX: MTS) 7.4%; and Service Stream (ASX: SSM) 7.2%.

The list tends to chop and change: a week previously, Invocare (ASX: IVC), which is now 6.8% shorted; The A2 Milk Company (ASX: A2M) 7%; and Flight Centre (ASX: FLT) 6.8% graced the top 10 chart.

In most – but not all – cases, the companies have been targeted because of clearly-flagged recent problems. And if a company is not awash with woes, any shorting strategy is unlikely to be successful.

Tassal, for instance, is suffering from poor COVID-19 afflicted export markets and an unfavourably strong Aussie dollar, as is counterpart Huon Aquaculture (which has had its own strife with a $4 million fish theft).

Stem cell drug developer Mesoblast has had a number of clinical setbacks – including with its coronavirus program – while satellite operator Speedcast last year entered US bankruptcy protection.

A2 Milk is exposed to Chinese trade tensions and perhaps the perception its $8 billion valuation is simply too frothy for a marketing and branding company without a cow to its name.

We’re not so sure what the issues are with nickel mining (Western Areas) chickens (Inghams) or funerals (Invocare), but in the case of the latter the pandemic was not the bonanza many expected.

When fortunes turn

History suggests that shorted companies don’t necessarily need concerted buying campaigns – some may describe them as share manipulation – to turn around their fortunes.

For example, current retail hero JB Hi-Fi (ASX: JBH) wallowed in “most shorted” status in mid-2019. But the shorters took a bath after the stock soared on better than expected full year results.

Apart from how much a company’s register has been shorted in percentage terms, another factor is the degree of daily liquidity in a stock, which influences how many days it would take for a short seller to close out their position.

On this basis Invocare is ripe – even a dead cert – for a “short squeeze” and indeed the stock has partially recovered its losses after being dumped by 8% on 29 January.

According to Shortman, gold miner Northern Star has seen the shorted component of its register increase from 2.89% to 10.8% over the last month. It’s not clear whether that reflects a lack of faith in bullion’s store of value status relative to Bitcoin, or teething pains from its merger with Saracen Minerals.

In the case of Tyro Payments (ASX: TYR), the shorted component has risen from 1.2% to 5.2%.

The provider of merchant terminals was subject to a bruising research report from short seller Viceroy, which claimed a recent outage of these devices, was far worse than the company portrayed.

Tyro’s management dismissed the claims as “fake news”.

However, the company’s shares had been under pressure well before the 15 January report, losing half their value since October. Interestingly though, they are trading some 10% above their 15 January nadir of $2.32.

Generally speaking, the shares of other companies singled out by scathing shorters’ research reports have recovered, including debt collector Credit Corporation (ASX: CCP), agrarian landlord Rural Funds Group (ASX: RFF) and, before the pandemic hit, Corporate Travel Management (ASX: CTD).

Two other shorting targets – Blue Sky Alternative Investments and Quintis – didn’t survive the roughing up and entered administration.

Sign of value

For sensible investors, the long and short of it is that a well-shorted stock can be a sign of value, but bear in mind that our most shorted stocks are still much less shorted than the likes of GameStop.

But rather than following the herd, investors should consider whether the company’s prospects are fundamentally sound.

In the case of GameStop, it looks like the Wall Street big boys will win after all and retail punters will lose their shirts … and shorts.

Most shorted ASX stocks