Sounds like trouble for Cochlear

Investors are betting heavily that Cochlear’s fortunes will decline.

Short interest in hearing device maker Cochlear has rocketed to 16 per cent of shares outstanding.

Since reporting in early August, the short interest in Cochlear has increased by around 75 per cent as investors take the view the company has further to slide as it battles to maintain market share in the market it once dominated. Such decisive moves in the short interest in a small period of time suggest the market is expecting Cochlear’s share price to slide further from here. 

Before the annual general meeting almost a month ago, short interest was at a less convincing level, oscillating around 11 per cent. Full-year earnings guidance released at the annual general meeting didn’t impress Cochlear shareholders as management tipped similar net profit to the financial year just gone, consequently sending the level of short interest higher.

Major competitor Sonova of Switzerland reports later this month, potentially moving Cochlear’s share price and short interest from current levels. Any guidance on market share from Sonova has the potential to put Cochlear even more out of favour with domestic investors.

Coca Cola Amatil is also racking up the short interest, with the measure gaining nearly 20 per cent in the past month to hover around 2.6 per cent. The short interest escalation coincides with the latest earnings downgrade, released earlier this week.

While short interest in Coca Cola isn’t as convincing as in Cochlear's case, the sharp rise in such a short period of time is reflective of a slightly more bearish view on the beverage giant.

In a market that has steadily risen for close to 18 months, changes in short positions at a company or sector level give an indication of more widely held views. The general consensus is the broader market will test new highs from current levels, limiting short interest.

Current short interest for the market is around 2.5 per cent of shares on issue, with much of this focused on small to mid-cap stocks.

One thing is certain when it comes to short interest – it is constantly varying as investors bet on companies or sectors that could fall from current levels.

But investors aren’t always right. JB Hi-Fi and Flight Centre recently had high levels of short interest, leaving investors with burnt fingers as both stocks have continued to find higher ground. In part, the share price rally was fuelled by pessimistic investors having to close out their short positions.