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Top Ten Shorted Stocks Rising

Top Ten Shorted Stocks Rising

By Bob Kohut 09.10.2017


Active retail investors managing their own portfolios need strategies for identifying potential targets for new investment, as well as for pruning dead wood from existing holdings.  While some view relying on “tips” from family and friends as borderline insanity, a “tip” from a professional financial analyst is seen as an indispensable tool.  Obviously, the expertise at hard research is a major difference.  Another is the fact analysts regularly ignore market sentiment in their Buy and Sell recommendations.

Market sentiment is frequently defined as “the overall attitude of investors toward a particular security or financial market.”  There are a variety of sophisticated technical indicators used to gauge market sentiment, but essentially, they all boil down to price movement.  It is not uncommon to find a stock with a rapidly rising stock price with little attention paid to many fundamental issues.  Nor is it uncommon to find a company with stellar fundamentals and a falling share price, both driven by market sentiment, or belief in the potential or lack thereof.

An analyst recommendation that ignores current market sentiment with the long-term conviction of growth on the horizon is little comfort to investors watching the price of a stock drop and drop, and drop some more.  Yet for many the assumption seems to be one must understand the tools of technical analysis to measure market sentiment.

Common sense argues otherwise.  A common feature of virtually all major financial websites, including theBull.com, are the Market Mover lists, highlighting the top ten gainers and the top ten losers.  These are clear indications of market sentiment, but the question that must be answered is will the movement last.  Technical investors rely on 60 or 120 day simple or exponential moving averages.  To approximate that indicator, any investor need only check a three month or six-month price movement chart for the stock in question.  Although such a strategy lacks the precision of moving averages, it presents a picture over a period of time of steady movement.

There is another indicator of market sentiment frequently ignored by the average retail investor and that is the Top Ten Short List.  While the vast majority of investors, both retail and institutional, are looking for stocks that go up in price, short-sellers are a subset of the market looking for stocks that go down in price.  A short-seller identifies a potential target and “shorts” the stock, borrowing share of the stock at a given price, pocketing the difference between the shorted price and the price at which the seller “buys back” or “covers” the borrowed shares.

The risk in short selling is massive if the stock moves in the wrong direction.  Consequently, short sellers have a reputation for rigorous research and analysis to protect their investments.  When they get it wrong and begin to rush to cover as a stock price continues to rise, the resulting “short squeeze” is a catalyst welcomed by investors buying the stock for future gains.

Perusing the Market Mover and Top Ten Short Lists can often identify some interesting target stocks.  On the closing trading day of September, three of the Top Ten Gainers for the day, ranging from 5% to 7.8%, were among the top five on the Top Ten Short List, with the most shorted stock – with a short percentage over 20% -- on the ASX –  Syrah Resources (SYR), in second place on the Top Ten Market Gainer List at 7.8%.

Both the six month and three-month price performance chart for SYR indicate the upward movement is more than a brief bump.


Many market experts caution against relying strictly on market sentiment without some consideration given to fundamental issues affecting the stock, even for the most skilled technical analysts.  

An introductory glance at Syrah and the other two stocks that made both lists – Orocobre Limited (ORE) and Western Areas Limited (WSA) – reveal that all three are miners and what they mine is in demand in the race to improve lithium-ion batteries.

Syrah Resources is in the process of developing graphite mining operations in Mozambique; with graphite in demand for the anodes in Li-Ion batteries.  

Orocobre has lithium operations underway in Argentina. 

Western Areas mines nickel which, along with graphite, is a critical component of the batteries to be used in US-based Tesla motors Electric Vehicles (EV’s).

The following table lists the price action of all three, along with historical performance and current balance sheet information.


An article appearing in hotcopper.com on 3 March of 2016 showed the explosion in the price of lithium in the first quarter of that year.


On 13 September of this year Alan Kohler’s website the constantinvestor.com posted a price movement chart for lithium in 2017.


The price is skyrocketing largely due to the belief amongst commodity investors that the EV “revolution” will see Li-Ion batteries supplant petroleum as the primary source of power for vehicles around the world. Skeptics would be well advised to consider the growing number of major automobile manufacturers getting into the EV market.  They would also be well advised to consider the stated goals of France, the UK, China, and India to ban combustion engine vehicles over the next several decades.

Why then have the short sellers been piling on Orocobre?  

First, although the company is already generating revenue from its borax and lithium mining operations in Argentina, the flagship Olaroz Lithium Facility is a joint venture with Orocobre a 66.5% owner.  The company sold some of its assets to Advantage Lithium, maintaining a 50% royalty interest. The latest Quarterly Report showed slumping revenues due to bad weather and lower prices for borax.  

Second, Orocobre operates exclusively in Argentina, where economic and business conditions have been improving, but there is still an element of sovereign or country risk.

Third, an abundance of miners is likely to rush in to fill the supply side of lithium given the dramatic price increases.  As has happened in similar situations with other commodities, supply could increase to the point prices begin to drop.  This is a scenario foreseen by Deutsche Bank where expectations are the price of lithium carbonate will level off around US$10,000 per tonne. 


Like Syrah, the share price of Orocobre is on an upward trend.


Syrah Resources Limited (SYR) has the dubious distinction of reaching the top spot on the Top Ten Short list, despite its claim to be developing the world’s largest graphite resource at its Balama Project in Mozambique.  The project is cost-effective open-pit mining and the company will use the high-grade graphite to go into the anodes of lithium-ion batteries via its Australia-based BAM Project.  Initial production has been pushed back to Q3 of this year.

Mozambique also presents a degree of sovereign risk and delaying the start-up of production is likely further fueling the shorting fires.  However, Syrah has five supply agreements in place and investors need to know a Lithium-ion battery contains more graphite than lithium!

Western Areas (WSA) mines nickel, a commodity with a declining price.


In addition, nickel has yet to hit the radar screen of critical components used in the manufacture lithium-ion batteries to watch.  Early rechargeable battery developments included the nickel–metal hydride battery (NiMH), now gradually fading into oblivion in the face of the superior Li-Ion battery. The financial press only recently covered comments from Tesla’s Elon Musk, claiming the company’s batteries might be more appropriately called Nickel-Graphite batteries.  Tesla recently rolled out its Model 3 to great fanfare but is already falling substantially below its own production goals. 

Investors considering Syrah or Western Areas need to monitor the progress of Tesla.  Analysts are bullish on Orocobre and Syrah, with OUTPERFORM ratings and lukewarm on Western Areas, with a HOLD recommendation.

Western Areas has two operational mines in Australia at Flying Fox and Spotted Quoll with a development project in progress at the Cosmos Nickel Project, a shuttered mine acquired from global mining giant Glencore.  Nickel prices recently rebounded somewhat and despite a grim year Western Areas Full Year 2017 Financials showed NPAT (net profit after tax) swinging from a loss of $26.7 million to a profit of $19.3 million with a slight increase in revenues from $209 million to $214 million, already sending some short sellers scurrying to cover. 

Western Areas stands to profit handsomely from the EV boom, should the boom materialise, as most analysts and experts expect.  The key will be the use of nickel in Li-ion batteries.  Currently, there are a variety of materials in play in the rush to produce a Li-ion battery with the capacity required for EV’s to become mainstream, most notably distance before recharging.  Although the company has made great strides towards lowering production costs, a recent research note from Goldman Sachs recommended investors SELL the stock due to its higher share price not justified with the current price of nickel.  In the company’s favor, the Cosmos acquisition has the capacity to double the company’s production output once the mine is fully commissioned.  A DFS (definitive feasibility study) is to be completed in 2018.

With the rise in the price of nickel and the additional buzz on EV’s generated by country commitments, the stock price has performed well over the last six months.




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