Buy Hold Sell: 3 of the ASX's most-shorted stocks (and 2 long-term compounders)

Buy Hold Sell

Livewire Markets

Total short selling on the ASX has been on the rise since the start of the new financial year, with short interest lifting 53% since then. 

That's according to ShortMan, which tracks the 100 most-shorted stocks on the ASX. As it stands today, there are 14 stocks with a short interest greater than 8%. This means that 8% or more of the shares on a company's register are currently being shorted. 

Hedge fund managers, or long/short funds, use shorting to target (and ultimately benefit) from a stock's falling share price. They rarely target stocks tracking on a steady upwards trend (as this can lead to a short squeeze, as we saw with GameStop). 

According to QVG Capital's Josh Clark, anything above 8% should be considered "big". Investors should keep this in mind because stocks with large short positions are often more volatile and sensitive to market news and announcements. This is true for both positive and negative news - as we have seen in recent weeks, with many of the ASX's most-shorted stocks surging off their lows amid the recent market rally.

So in this episode, Livewire's Ally Selby was joined by Clark and ClearLife Capital's David Moberley for their analysis of three heavily shorted stocks. 

Plus, for a spoonful of spice, they also name one stock with enviable compounding potential over the long term. 

Note: This episode was filmed on Wednesday, November 9th 2022. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript 

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today, we have a little bit of a long/short special for you. We're going to be taking a look at three of the most shorted stocks on the ASX, as well as two compounders for the long term. To do that, we're joined by David Moberley from Clearlife Capital and Josh Clark from QVG.

First up, we have a crowd favourite, it's lithium miner Vulcan Energy Resources. It has a short interest of 7%. David, I'm going to start with you. Is it a buy, hold or sell?

Vulcan Energy (ASX: VUL)

David Moberley (SELL): It's a sell for us. There's a lot of lithium that needs to come to market in the next few years and I hope that it works. We've got some question marks around the commercialisation of that asset and the valuation where it stands probably doesn't justify the risk that we see. So sell from us.

Ally Selby: It seems investors agree. Its share price is down 28% since the beginning of the year. Josh, over to you. Is it a buy, hold or sell?

Josh Clark (SELL): David's spot on the money. It's a sell. To the valuation point, it's a billion dollars worth of market cap that just doesn't seem to be pricing in some of the complexity. The resources are pretty loosely defined. It's a new extraction technology, DLE via absorption. It's only been done once before, to my understanding, in the Andes on a completely different asset with different chemistry. And even that business, Livent (NYSE: LTHM), looks like they're expanding not only into absorption but into other technologies, which I think speaks to the capital costs that are required for that particular technology.

So there's a lot of money that's got to go into that enterprise value, that adds to that existing valuation headwind that David talked about. So it's pretty complicated. And on top of that, they're making it more complicated for themselves by going into France and Italy at the same time as Germany. That's before we start talking about things like regulatory approvals. So I'd just say that anyone who thinks that it's going to be smooth sailing is probably a little bit optimistic with this one. So I'd say it's a sell.

Domino's (ASX: DMP)

Ally Selby: Okay. Next up, we have Domino's. Do you like pineapple on pizza? It has a short interest of 11%. Josh, is it a buy, hold or sell?

Josh Clark: I don't think pineapple on pizza is controversial. Pineapple on pizza is a buy. Domino's-

David Moberley: I'm also a buy on pineapple on pizza, just to be clear.

Ally Selby: Honestly, so am I. Pineapple on pizza is amazing, but on Domino's? 

Josh Clark (SELL): That's right. We're talking about Domino's. The stock I'd say is a sell. I think it is a little bit too expensive. It's on around 20 times pre-tax earnings, which is really a growth multiple for a business that is not really growing at the moment. They've had a difficult first half. I think there's a real challenge for them to get to market expectations for the second half and then, also, growth expectations into the next financial year. So that's a fair amount of work that they've got to do, just to meet expectations and stand still. And that's in an environment where the franchisees are really feeling the pain in terms of the rising cost of doing business. And that slows their rollout just because those franchise economics are not quite as good as they were. So I think you really need to see a better valuation for Domino's to be anything other than a sell.

Ally Selby: Okay. Its share price has also been suffering from a little bit of pain recently. It's down 53% in 2022. Over to you, David. Is it a buy, hold or sell?

David Moberley (HOLD): It's a hold from us. As Josh highlighted, the business has had some earnings pressure. The question mark we're grappling with at the moment is the current trajectory of earnings or the run rate in growth reflective of the more medium-term opportunity, given the store rollout. And agree, the valuation probably looks a little bit toppy now, but it's something that we like. We're attracted to the growth opportunity in the business, just want a better entry price.

Breville Group (ASX: BRG)

Ally Selby: Okay. Next up, we have Breville Group. It has a short interest of 9%. David, is it a buy, hold or sell?

David Moberley (SELL): Sell from us. Again, great business and the medium-term opportunity looks good, but they're holding a lot of inventory. And unfortunately, in this environment, there are a lot of risks around the economy. Slowing top lines for retailers, you don't want to be long inventory. Sell from us.

Ally Selby: You're not buying a coffee machine anytime soon?

David Moberley (SELL): No. And there are some question marks over whether the inventory is as good as a Rolex, but I'll hand that one over to Josh.

Ally Selby: Okay. It's also heavily in the red in 2022. It's down 37% year to date. Josh, over to you. Is Breville a buy, hold or sell?

Josh Clark (SELL): I've got to agree with David on this one. I think Breville's a sell. I think they've got plenty of things going in their favour. Great management team, great products, great global growth story through geographic expansion, but they've also benefited from the work-from-home theme over the last few years. So that phenomenon has really driven an elevated level of purchasing in terms of food prep and manual coffee machines. So they've benefited from that, but I think there's a little bit of over-earning to potentially come out of the business.

Competitors, like Whirlpool or the guys who own KitchenAid or De'Longhi, they're really seeing rising cost pressures within the business and weaker consumer sentiment, and that's slowing their revenue growth. So even though Breville's got a bit of a better skew into manual coffee in North America, which is the segment and the geography doing better within the business, I just don't think it's enough to offset that pressure at this point.


Ally Selby: For a little bit of positivity, we're going to ask our fundies for a long-term compounder today. Josh, what have you brought for us?

Josh Clark (BUY): Yeah, I don't hate everything. There are some stocks that I like. I think HUB24 fits well into that long-term compounder bucket. So really quickly, they're effectively an investment platform. So if you're an adviser or an investor, you'll put funds on the platform, which gives you benefits like tax optimization, saves you time and saves you cost. Portfolio customization is another benefit that you'll get from being invested on that platform.

But in terms of the compounding that you've asked about, I think it's all about the compounding factors they get behind earnings. So fees for them are exposed to the assets under management that they have. Markets typically go up through time. So that's a medium-term tailwind for earnings compounding within the business. They're also winning share. They're winning share at a rate of about 10% of flows. And currently, they've got a market share of 5%. So market share should at least double and they've been growing the rate of flows throughout the life of the business.

And I also think the business gets stronger with scale. So they can leverage those economies of scale to pump more money back into research and development, and keep the product fresh and ahead of the market. And it's not really talked about, but that scale potentially also gives you the opportunity to pass some of that price back to customers and further entrench yourself in the future. So yeah, HUB24 would be a compounder for me.

IDP Education (ASX: IEL)

Ally Selby: Okay. Over to you, David. Josh brought along HUB24. What's your pick of the bunch?

David Moberley (BUY): You'd be shocked to know it's IDP Education. The medium-term opportunity for the business is enormous. Quick background, they are basically the global leader in high-stakes English language testing and also a student placement business. The opportunity for the business through COVID-19 has been significantly strengthened through the acquisition of basically a monopoly position in India, which is the fastest-growing higher education market, globally. And the company's got a great balance sheet. And once again, despite being a global leader, it only has a single-digit market share right now. So looking forward three to five years, the earnings power of the business is significantly larger than what it is today. And as long as they execute, there's a great opportunity for them there.

Ally Selby: Okay. Well, I hope you loved that special as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every single week.

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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.

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