Introduction
The aim of this Short Selling Case Study ASX:ACL is to examine what happens when the market shifts against short-sellers in a heavily shorted stock. Many investors follow stocks with high short interest because, if conditions improve, the unwinding of short positions can fuel a sharp rally. But what causes these reversals, and how can investors recognize the signs early? Let’s take a look at Australian Clinical Labs (ASX: ACL) as a case study.
Short Squeeze?
I wouldn’t go so far to label this as a short-squeeze, but more of an aggressive exit. For context, a short-squeeze occurs when short sellers become trapped due to a dramatic increase in demand for a heavily shorted stock. [refer to my article on short-selling for two examples of a short-squeeze].
In the case of ASX:ACL, business conditions have improved but not substantially and not in a way that is really surprising. The short sellers would have anticipated that this would happen one day and appear to have been ready to react. They were not trapped nor overwhelmed by buyers. Nevertheless, this “orderly” rally still saw the share price jump 50% in the space of around 2 months.
Australian Clinical Labs (ASX:ACL)
ACL was a big winner during COVID-19, benefiting from high demand for pathology testing. However, as pandemic-related testing volumes declined, so did earnings and investor confidence.
The decline in earnings in 2023 and 2024 was flagged to cease in the companies full-year results in August 2024. An increased dividend and a share buy-back were also positive for shareholders and negative for anyone that had sold the stock short.
It is clear that the share price reversed when that became apparent. It has also coincided with the short sellers aggressively cutting their short positions from over 10% to less than 2%. In 6 months, the share price is up over 50% as a result.
Conclusion
When a heavily shorted stock begins to recover, the resulting price movement can still be substantial, even without a full-blown short squeeze. In the case of Australian Clinical Labs (ASX: ACL), short-sellers were not caught off guard, but they still acted quickly to unwind their positions. This more orderly exit helped drive a 50% share price increase in just a few months.
However, this example also reinforces the discipline of short-sellers. They are rarely caught by surprise and often time their exits well, as seen with ACL. As discussed in my top 20 most shorted ASX stocks analysis, they tend to be right far more often than they are wrong.
📌 Key Takeaway:
Short interest can be a valuable signal, but not every stock with high short interest will experience a squeeze. Instead, investors should watch for signs of improving fundamentals, corporate actions, and short covering to gauge potential opportunities. The biggest moves often come when short-sellers exit in unison, whether gradually or in a rush.
Disclaimer: This information is provided purely for educational purposes. It takes no account of an individual’s personal financial circumstances and hence can in no way constitute financial advice. The above data may be subject to errors or inconsistencies for which the author takes no liability. It is imperative that all investors do their own research or if they need advice, seek it from a qualified financial adviser.
Short Selling Case Study ASX:ACL