3 Aussie stocks who make prime “short squeeze” candidates

James Gerrish

Market Matters

Over the last few days, the news has been full of retail investors using social interaction platform Reddit to take on professional hedge funds, a fascinating situation that saw GameStop (GME US) trade ridiculous ranges. I can just imagine how ASIC would regard such moves. This week so-called internet “chatter” has seen a number of major stocks shorted by hedge funds rally aggressively as a scramble to reduce these positions ensued, an index of the most shorted stocks fell 8% overnight as we saw reversion after trading restrictions were imposed – it's ok for hedge funds to make billions but not lose it?

The rules feel inequitable in markets at times, at MM we occasionally find ourselves frustrated by not getting decent allocations to placements/capital raisings although this has improved since the GFC plus we must be mindful that these corporate actions usually need to be satisfied quickly and large retail participation can have the opposite effect. Interestingly, overnight I did see both Democrat and Republican lawmakers criticize these restrictions on retail investors, my initial thoughts have resulted with 2 underlying beliefs:

  1. Slowly but surely the playing field for retail investors is becoming more equitable, which is a great thing and something MM has always been passionate about;
  2. Never underestimate the power of social media, it's here to stay and will get stronger.

Robinhood Markets, the hugely popular app which is used by millions of amateur traders is caught in a very tough position over its stock trading clampdown as are other major online broking houses. The company has already been hit with 2 customer lawsuits and more will probably follow; this could literally smash the company’s business model in one go if negative social media coverage continues to increase momentum. The question is simply – why can hedge funds freely trade in stocks when retail traders are blocked? The consternation around the introduced regulations will be discussed by many for a long time but we would rather focus on potential ramifications moving forward.

We’ve mentioned the newly named “Reddit Army”, a new market phenomenon which the canny investors can utilise to add some alpha to their portfolio, at least while the fad remains. My best description is this new game is similar to a large financial game of musical chairs where in this case you want to both get on and off the train early. As the chart below illustrates the surge in GameStop (GME US) was all over in 4/5-days and the stocks basically halved since last Thursday – again as we have been saying 2021 is a year where investors and traders alike need to be both active and prepared to sell.

We feel that some very professional influencers will be embedded within this mass of retail investors, there are huge amounts of money to be made, especially for people who can be ahead of the curve – legally referred to as front running. It may take years, if ever, for all of the trades to be unwound by the regulators assuming a witch hunt does indeed eventuate but that’s not our business at MM.

At MM we have no interest in buying/chasing stocks on rumours around short squeezes, but 2 things are worth bearing in mind:

  1. If a stock/position we hold such as silver does get ramped up by these new market influencers, we will look to sell into such panic (e.g. watch for alerts around silver).
  2. While we won’t be buying stocks due to their short position, in a similar fashion to a potential takeover target it does add some nice icing on the cake when we balance the risk/reward.
Heavily shorted illiquid stocks remain vulnerable to further “short squeezes”.

GameStop (GME US) Chart

One of the top performers last week was URW which rallied ~15% following major short-covering overseas. Today I have again looked at 3 stocks locally which carry major short positions and could be prime candidates for a potential short squeeze. In our opinion, if we do see a number of such squeezes in the vast majority of cases it will represent some sort of “get out of jail free card” as opposed to the start of a huge turnaround story i.e. again be prepared to sell!

MM is neutral URW.

Unibail-Rodamco-Westfield (URW) Chart

1. InvoCare (IVC) $11.37.

Funeral business IVC is carrying a major 8% short position which could be tested especially now they have a new CEO at the helm. To put this short position into perspective it will take around 30-days to cover at the current average daily volume, that would make me very concerned as a trader especially after the shares have already declined ~40% due to concerns around increasing competition. This is a potential recovery story which MM didn’t consider buying yesterday but I definitely wouldn’t be short.

MM is bullish IVC as a trade with a 6% stop.

InvoCare (IVC) Chart

2. Tassal Group (TGR) $3.42.

Salmon and trout producer TGR is carrying a massive 12.4% short position with the market very concerned that Chinese duties on Australian seafood could hammer the Tasmanian producer. The combination of insider buying in December and a 5%-part franked yield are the main reasons we wouldn’t be short this stock and in fact, we would be more inclined to accumulate into current weakness as opposed to short.

MM likes TGR into weakness.

Tassal Group (TGR) Chart

3. Avita Therapeutics (AVH) $6.53.

AVH is carrying an 8.4% short position as traders believe COVID will hinder the companies growth prospects this year following a tough 2020. However, in mid-January the company delivered over 50% growth in revenue for the 2nd quarter questioning this view in my opinion – the risk/reward looks attractive for traders with stops under $6.

MM likes AVH as an aggressive play with ~9% stops.

Avita Therapeutics (AVH) Chart

Conclusion

MM can see a basket of IVC, TGR and AVH outperforming the ASX at least in the next month – very short term I know however some ideas to ponder for the more nimble investor.

Make informed investment decisions

At Market Matters, we write a straight-talking, concise, twice daily note about our experiences, the stocks we like, the stocks we don’t, the themes that you should be across and the risks as we see them. Click here for your free trial.


James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.