Download What can happen when short selling goes wrong Philip

What can happen when short selling goes wrong
Philip Baker
19 November 2016
The Australian Financial Review
22
Baker
If all the short sellers in Myer - and there are a few of them out there as it's the most shorted stock
in the sharemarket - want to buy back their position, it will take them 45 sessions to do it.
That's based on the average volumes the stock has traded on in the past, according to the Coppo
Report (by Bell Potter's Richard Coppleson).
But the 10 per cent jump in the price of Myer shares on Friday - after some better-than-expected
sales numbers - shows just how quickly short sellers can drive up the price when they get caught out.
About 16 million shares changed hands by midday on Friday, the most in a single session since early
June.
Myer has been the most shorted stock in the market for quite some time.
About 17 per cent of the available stock has been short sold as investors bet the traditional
department store owner will struggle to retain its relevancy and earnings amid tougher competition
from online and international players.
But on Friday it was clear that chief executive Richard Umbers' turnaround strategy is gaining ground
and the short sellers were scrambling to cover some of their positions.
This is the dark side of short selling - the "short squeeze".
When it plays out, traders on a desk are sometimes overheard saying they can actually smell the
odour of burning flesh through the screen as the price skyrockets higher.
There was a time when the dream of every sharemarket investor was to make their fortune by
finding and then buying the best stock available. Then all they had to do was sit back and watch the
price go up.
These days there's a new breed of investors that do the exact opposite.
They search for the worst stock in the sharemarket, short sell it and hope the price then falls out of
bed.
In any other walk of life, selling something you don't own is a crime and one reason why some
(usually CEOs of companies that are under attack) think it should be banned.
But in a low-growth world it has become a respectable way of making money, and those that do it
are usually very good.
Think Dick Smith and Slater & Gordon.
Companies such as Myer, WorleyParsons, Bellamy's, Nine Entertainment, Metcash, Monadelphous
and Aconex all have more than 10 per cent of their stock short sold.
Shares in Aconex fell 20 per cent over the past week and it was one of the worst performers in the
top 200. The stock has struggled since it reached $8.53 in early July and on Friday lunchtime it was
fetching around $4.55.
Aconex, which provides a software platform for collaboration in the construction industry, delivered
its full-year profits in line with expectations in August but its shares have been heading south ever
since.
The stock is a pure growth play and, with a forward price earnings ratio of more than 50 times
forward earnings, was a red rag to the short sellers who know that with those sorts of PE multiples,
it can only be sustained if the outlook for growth remains in double-digit figures.
It would take the short sellers around 11 sessions to buy back their short positions in Aconex based
on past trading volumes. But for other notable stocks that are short sold, it can take much longer.
For example, it would require 28 days of normal volumes to cover the short positions in
Woolworths, 45 days to get square in Nine Entertainment, 21 days to buy back the shorts in
Metcash, 13 days for Bellamy's and Blackmore's and 12 days for Alumina.
Of course, if the short sellers are right and the stock collapses, they can take their time and let the
price come to them.
But if things don't go to plan, the squeeze is on and the price can go through the roof. On those days
volumes and the price are always much higher than usual.
The arrival of short sellers is one reason why investors see such big swings in a day, both up and
down as they cover or initiate new positions.
Shares in Silverchef were down almost 20 per cent at one stage on Friday after the company was
forced to re-state its earnings after it was hacked.