Buy Hold Sell

Buy Hold Sell: 5 of the ASX's most-shorted stocks (and 2 that are big buys)

Fri 15 Dec 23, 10:00am (AEST)
BUY HOLD SELL PrimaryYoutube (11)
Source: Livewire Markets

Key Points

  • Both investment managers believe Pilbara Minerals is a Hold and agree that shorting it is risky due to potential squeezes
  • Bank of Queensland is expected to continue to face market share pressure, declining ROEs and regulatory issues
  • REA Group and Lendlease both have sizeable short interests but are viewed as Buys

Currently, there is a 22% short interest in fallen lithium darling Pilbara Minerals (ASX: PLS). This is up from around 3.7% a year ago - meaning that today, 22% of the shares in this hard rock lithium miner are shorted. 

I know what you are thinking... Oh, anonymous writer! Why should I care? After all, Pilbara's share price has sunk around 30% over the last few months, and lithium spodumene prices have suffered a far worse fate. 

Well, if there is anything we can take away from the great GameStop saga, it's that short squeezes come heavy and fast. And, even a small inkling of positive news can result in a sharp rise in share price, forcing hedge funds and traders to close out their positions to avoid painful losses. 

So in this episode, Livewire's Ally Selby put it to First Sentier's David Wilson and Atlas Funds' Hugh Dive for some contrarian analysis of the ASX's most shorted stocks. 

Plus, they also each name two stocks with big short interests that they are currently buying. 

Note: This episode was recorded on Wednesday 13 December 2023. You can watch the video, listen to the podcast, or read an edited transcript below. 

Edited Transcript 

Ally Selby: Hello, and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're taking a look at three of the most shorted stocks on the ASX. Plus, we've also asked our guests to name one stock they're buying today that still has a big short interest. To do that, we're joined by First Sentier's, David Wilson, and Atlas Funds Management's, Hugh Dive.Okay, let's get straight into it. We're starting with the most shorted stock on the ASX. It's Pilbara Minerals with a 22% short interest. Hugh, I'm going to start with you. Is it a buy, hold, or sell?

Pilbara Minerals (ASX: PLS)

Hugh Dive (HOLD): I'd have to come up with a hold. We don't own it, but at 22%, as a shorter, you're taking a very large risk. If we see a spike in the lithium price or if there's a bid for the company, that's a very narrow door with a lot of people trying to get out very, very fast. We saw it earlier on this year with the shorters in Liontown. That was pretty unpleasant for the shorters there, up 20% in one day to try to cover on a bid. Definitely wouldn't be shorting it though.

Ally Selby: Yeah. Okay. Over to you, David. Its share price is down around 23% over the past year. Is it a buy, hold, or sell for you?

David Wilson (HOLD): For us also it's a hold. It's a well-managed business, and also, shorting a company with a pretty good balance sheet, so it hasn't got the sort of debt stress that shorted stocks often have. It's going to have to spend nearly $2 billion over the next couple of years expanding its production, but we think the company's in a reasonable place and the Spodumene price has come off a long way. Earlier on in the year it was nearly $8,000 a tonne. Now it's back to $1,400. So we think the company is in a reasonably safe place, so for us it's a hold.

Ally Selby: Okay. Next up we have regional bank, Bank of Queensland. It has a short interest of 8.22%. Staying with you, David. Is it a buy, hold, or sell?

Bank of Queensland (ASX: BOQ)

David Wilson (SELL): For us, Bank of Queensland is a sell. We think it has got market share pressure. We think its ROE is probably going to go from something like 7.5% to 5.5% over the course of the year. It's got cost pressures. Its NIM (net interest margin) is under pressure. So we think the stock is definitely a sell.

Ally Selby: Sounds like a lot of bad news. Over to you, Hugh. Is it a buy, hold, or sell?

Hugh Dive (SELL): I have to agree with David. Fundamentally, the regional banks are in a much constrained position compared to the major banks. We see that they're in a constrained capital position. They have a much higher cost of capital, which sees them having - when they compete with the major banks - they have a much lower NIM. And as David mentioned, the declining ROEs. The competitive position is pretty tough there. There's no takeover in the wings there. Have to be a sell.

Ally Selby: Okay. Next up today we have IDP Education with a short interest of 9.87%. Hugh, last one for you today. Is it a buy, hold, or sell?

IDP Education (ASX: IEL)

Hugh Dive (SELL): A strong sell, and I'm sure that short position has increased over the last couple of days. A lot of very miserable headlines about English testing and migration. There's a big part of this company's business doing English tests for upcoming migrants. If we see a dramatic cut in the migrant intake, that will have a big cut in terms of their earnings. It's trading at about 40x earnings with a sub-2% yield. There's a lot of risk there and not a lot of margin of safety. This company had a very good FY23, as we saw a bit of a catch-up margin. The regulatory issues are far too high for this company.

Ally Selby: Even though it had a good FY23, its share price hasn't performed well at all over the past year. It's down 26%. Over to you, David. Is it a buy, hold, or sell?

David Wilson (BUY): For us, Ally, it's a buy. We think that the share price reaction over the last couple of days has actually been overdone. There's been a concern about the cut in immigration, but most of that immigration will be cut at the low end of the education market. IDP plays very much in the high-end of the education market, from a student placement point of view and even from an English language testing point of view, where it's actually going to get tightened up, and so you'll actually see an increase in testing.

I think the more important concern, is not so much what is happening in Australia, but it's actually the Canadian market where the English language testing market share is under pressure. I think, though, with the share price now having reacted to what's happening in Australia, that's largely been factored in, almost accidentally. So, I think the stock is in a reasonable place. Perhaps the market reacted a little bit to the CFO changing, but I think that was a matter of time anyway as well. With the share price now back near $20, we've become more relaxed about it from a valuation point of view, and so at this point, for us, it's a buy.

Ally Selby: Okay. This one's a little bit of a spicy one. We asked our guests to bring along one stock with a large short interest that they believe is still a buy. David, what's your buy today?

REA Group (ASX: REA)

David Wilson: For us, Ally, it's REA Group. We think that this is a company with real pricing power. It has 70% of the residential classified market. It's a well-run business. We're not so enamoured with what they're doing in India - I think that's a little bit untested. But this company has real pricing power and we can see it growing double-digit earnings for many years. And also, you're only now getting a recovery in the property markets in Sydney and Melbourne, and generally they're a lead indicator for the rest of the market.

Ally Selby: Okay. Over to you, Hugh. Where are you going to go head-to-head with the short sellers?

Lendlease (ASX: LLC)

Hugh Dive: With Lendlease. It's been a very unpopular pick. It's been a poor performer last year, and it continues to be a poor performance this year. But looking at the company, there are very low expectations for it to jump over. Part of that has been problems with the execution on the development earnings. That's expected to jump from $3.8 billion to $8 billion over FY24 as a lot of those COVID delays catch up. This is a company where the expectations are very low. If they come even close to delivering on those earnings, definitely we'll see a jump. Currently, the quality of the business is a lot higher. They've got rid of engineering, which was a never-ending source of torment for investors, and they also have a funds management business of $48 billion in property funds being largely undervalued by the market. We've got Aware Super, one of the industry funds, sitting there at 8% [on the register]. It could be a potential takeover target now that it's cleaned up things a little bit. Yeah, so that's our pick.

Ally Selby: Okay. Well, I hope you enjoyed that episode of Buy Hold Sell 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 just like this every single week.

Written By

Buy Hold Sell

Buy Hold Sell is a regular video series where Australia's leading professional investors share their views on Australian and Global Shares. This content is produced by Livewire Markets and has been syndicated to the Market Index website.

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