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Why these heavily shorted stocks of 2019 can outperform in 2020

Brendon Lau
share price rollercoaster

This probably isn’t a good year for short-sellers. Our market is not only trading near record highs but several of the most targeted stocks by this bearish group of traders have outperformed strongly.

This may also explain why the total number of shares being short-sold have dropped over the year by 3.4% to 5.2 billion shares, according to the latest ASIC data.

Investors should take note of the data for a few reasons.

Why you should care what short-sellers are doing

Firstly, this is often a useful barometer on how bullish or bearish the market is about 2020. Short-sellers are typically more sophisticated than the everyday investor.

Short-sellers borrow stock to sell on-market in the hope of buying it back cheaper at a later time. This allows them to profit from the difference.

The second reason to pay attention to what this group is doing is to identify stocks that could rebound in the new year.

Short targets gone rouge

Some of the stocks that have recorded the biggest increase in short-selling interest over the year have powered ahead. Gold miner KIRKLAND/IDR UNRESTR (ASX: KLA) is a prime example as short-interest in the stock jumped by the most of any ASX company in 2019.

Short-interest (the percentage of its shares being shorted) in Kirkland steadily increased over the year from nothing to 23.4%. During the time, the KLA share price surged nearly 60%.

The Nearmap Ltd (ASX: NEA) share price is another example with the stock surging 75% over the year.

There was also next to no short positions in Nearmap at the start of the year but the percentage of its shares being shorted stands at around 11.5%. The stock saw the second biggest increase in short-interest for 2019.

Shorts turning long in Webjet

What’s more notable are ASX shares that have seen a big jump in short-interest over the year, but have seen a bit of a reversal in December.

This could indicate an important turn in negative sentiment and may signal a buying opportunity. I think some of these stocks have a good chance of outperforming the market in 2020.

One that sticks out is the Webjet Limited (ASX: WEB) share price. This is the third most targeted stock by short-sellers (based on the increase in short interest over the last 12 months).

Short-interest in Webjet surged 9.4 percentage points in 2019, but short-sellers have been closing their positions in the stock since the start of December when short-interest fell 0.7 percentage points.

Building to a rally

An upbeat trading update at its annual general meeting last month and takeover speculation are likely reasons why the bears are in retreat.

Household fittings supplier GWA Group Ltd (ASX: GWA) is another worth watching for 2020. The stock saw the fourth largest increase in short interest of 8.6 percentage points to 12.3% over the year, but the number of shorts fell 2.5 percentage points in December.

The recovery in the housing market and expectations that building activity will rebound are likely reasons for the turnaround in sentiment.

I believe there’s plenty of room for the GWA share price to rally in 2020.

The post Why these heavily shorted stocks of 2019 can outperform in 2020 appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of Nearmap Ltd. and Webjet Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019