Buy Hold Sell: 5 of the most-shorted stocks on the ASX

Buy Hold Sell

Livewire Markets

In a market of headwinds aplenty, where nothing really seems to be working, one momentum trade continues to gain traction... Buying the ASX's most shorted stocks. 

In fact, since hitting lows in June, companies like Betmakers, Nanosonics, Block, Zip Co, and Lake Resources have skyrocketed higher, lifting a respective 33%, 47%, 30%, 132% and 101%. 

So what does this mean for investors like you? Well, my friend, cast your mind back to the now infamous short squeeze of January 2021 - GameStop. 

Back then, hedge funds were forced to cut their losses and buy back shares to cover their short positions, as retail investors continued to bid GameStop's share price higher. This drove the momentum in the company's share price, forcing it higher still. Its a classic supply-demand equation, but in this case, not enough supply of those selling the stock, and too much demand from buyers.  

So could there be some short squeeze candidates hiding among Australia's most-shorted stocks? Unfortunately, for us investors, this is a very difficult (and potentially dangerous) game to play. 

So why not take a longer-term view? In this episode, Livewire's Ally Selby was joined by Ben Clark from TMS Capital and Henry Jennings from Marcus Today for their views on the five most-shorted stocks on the ASX. 

Note: This episode of Buy Hold Sell was filmed on Wednesday 17th August 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. Today, we're going to be taking a look at some of the most shorted stocks on the ASX. To do that, we're joined by Ben Clark from TMS Capital and Henry Jennings from Marcus Today. 

First up today, we have the most shorted stock on the ASX. It's Flight Centre. It has a 14.24% short interest. Henry, I'm going to start with you today. Is it a buy, hold, or sell?

Flight Centre (ASX: FLT)

Henry Jennings (SELL): I think it's still a sell. 14% - that's a big short, isn't it? You would expect to see some volatility if somebody decides that this is the day to buy some back. But I think it's still a sell. There is a Flight Centre where I have an office in the suburb. It is still empty. There is nobody in there, and it's very expensive rent there. I think the whole game has changed in terms of travel, and I don't think Flight Centre has really adapted as well as it should. I think that's why it's 14% shorted, so I'm going to keep going with a sell.

Ally Selby: Flight Centre's share price has really struggled to take off in 2022. It's pretty flat and down 4%. That said, over the past year, it has risen more than 27%. Ben, do you think it's a buy, hold, or sell?

Ben Clark (HOLD): I'm going to go a hold. It's even bigger than that 14% as the founders aren't selling their shares, it's probably over 20% of the script that trades. But look, I'll go a bit the other way. I think people are going to travel on mass next year. I think everyone wants to use a travel agent again. I spoke to a guy I use yesterday - he said he cannot keep up with the inquiries that are coming in. I do think the margins the travel agents are earning these days are a lot less than they used to be. There are also twice as many shares on issue in this company as there were before COVID-19. I think that you're going to see growth just take off, but the market's already expecting that, and so it's about how heroic the assumption is. So bring it all together, I'll go a hold.

Betmakers (ASX: BET)

Ally Selby: Okay. Next up today, we have Betmakers. It has a short interest of 12.10%. Ben, staying with you, is it a buy, hold, or sell?

Ben Clark (BUY): I think this might be a buy. We've just seen a really bullish update from Flutter in the UK, which is the world's largest sports betting company. What prompted that was that the US sports betting market, which we know has been legalising and opening up, looks like it's now hit a tipping point. It's got at least a decade's growth to go. There was a bit of a scramble amongst the players before we saw these reactions in the market, and I wouldn't be surprised to see that coming through again. Betmakers are profitable. It doesn't trade on a crazy PE for a fast-growing small-cap tech stock. So I'd go buy.

Ally Selby: Okay. Its share price has fallen around 49% YTD, but over the past two months, it's really been soaring. Over to you, Henry. Is it a buy, hold, or sell?

Henry Jennings (BUY): I'm going to agree with Ben, I think this one's a buy. I think it has got a good pedigree, as Ben says, in terms of the management, Matthew Tripp. Also, Tom Waterhouse is involved as well, so that's pretty good pedigree there. As Ben says, the US has reached a tipping point on sports betting, and there's been a lot of money spent on land grabs and everyone trying to get their share of the market. The good thing about Betmakers is it's kind of agnostic. It's the platform, the picks-and-shovels, which has worked for many people in the past. 

Nanosonics (ASX: NAN)

Ally Selby: Okay. Next up today, we have Nanosonics. It has a short interest of 10.76%. Henry, staying with you, is it a buy, hold, or sell?

Henry Jennings (HOLD): I think for me, this one's a hold. It's got one great product, Trophon. It's terrific. They've gone into a little bit more high-tech on it. But they've changed their distribution and broken with GE Healthcare. It's not an unusual way of doing it because it's obviously known by lots of people, but there are risks. I think at the moment, those risks outweigh the benefits of the US opening up after COVID-19. So for me, it's a hold.

Ally Selby: Nanosonics' share price has fallen around 23% YTD, but it has rebounded a whopping 70% since hitting a low in June. Ben, over to you. Is it a buy, hold, or sell?

Ben Clark (HOLD): I completely agree with Henry. I'm going a hold. I think there is a positive for this business, which is the reopening of US hospitals and the massive backlog of procedures that are going to need to get done as a result. But you've got this murkiness about the main sales distributors, who were GE, and they're internalising that. Maybe that's going to be a great move in hindsight, but it could be a bit messy as well. When you're trading on 180 times earnings, messy can be brutal from a shareholder's point of view. So I'd just sit this one out or hold if you've got it and see how this plays out.

Lake Resources (ASX: LKE)

Ally Selby: Next up, we have a stock with 9.85% short interest. It's Lake Resources. Staying with you, Ben, is it a buy, hold, or sell?

Ben Clark (SELL): Sell. This one is actually a strong sell. It's got a $1.8 billion market cap. It's got a mine in Argentina, which will probably need close to a billion dollars spent on it to get it into production. It's still some years away from production and who knows what the lithium price is by then? A month or two ago, we’ve seen the CEO who put this all together literally resigned for no apparent reason and dump his entire personal stake in the company, so to me, this is a sell.

Ally Selby: Okay. Over to you, Henry. Is it a buy, hold, or sell?

Henry Jennings (SELL): This is such a tricky one because this thing moves 10-15% a day. So depending on the day this comes out, it could be a buy, it could be a sell. I don't know, but I think Ben is right. It's a sell for me. The market cap is too big, the prospects are not great, and J Capital (a large short seller) attacked it and they did make some valid points. As Ben said, the CEO went off into the sunset, selling his $10 million shares almost instantly. That doesn't usually happen. Usually, they make some personal reasons, gardening etc. So for me, there are much better lithium stocks to play, so at the moment, it's a sell.

Zip Co (ASX: Z1P)

Ally Selby: Okay. The last one for today is Zip Co. It has a short interest of 9.12%. Over to you, Henry. Last one for you today. Is it a buy, hold, or sell?

Henry Jennings (BUY): This is a tricky one because, again, it's so volatile. Any given day, it can be a completely different share price to the previous day. For me, this is probably a buy, and that's probably a little bit controversial. They are at least doing the right thing now. Instead of pursuing growth at any cost, they're cost-cutting. They're pulling back. They're rationalising. They pulled out of the Sezzle merger, which I thought was a really crazy move for them. So for me, this is a buy. It's not a bad business. If we are seeing interest rates peaking at some stage and recession risk falling - and even if we get a recession, in theory, BNPL could be a winner from a recession as people use it for budgeting purposes, so it's a buy.

Ally Selby: Okay. Its share price has performed pretty poorly in 2022, down 76%. But crazy enough, it's lifted around 139% since its low of 44 cents in June. Ben, last one for you today. Is it a buy, hold, or sell?

Ben Clark (SELL): Look, I'll go sell. Because although I think they are now on the right path to where they want to be, the path is still long, and it's still going to be some years before they do show profitability. The loaner arrears, particularly in the US, still look worrying to me. There's just too many people that aren't repaying these loans. Also, I look at a stock like Block (ASX: SQ2), which is just blowing the doors off, and it's consistently beating market expectations each quarterly. And it's still a mile off its high as well.

Ally Selby: Okay. Well, that's all we have time for today. I hope you enjoyed that episode 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 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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