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Is the Sirius Minerals share price about to fall off a cliff?

Back in January, I questioned why FTSE 250 CFD provider Plus 500 had quickly taken the dubious honour of being the most shorted share on the London Stock Exchange. Only a few days later, the company warned that profits this year would likely be “materially lower than current market expectations‘”and the stock plummeted in value.

Yesterday, Plus’s stock was priced around 800p a pop — 60% lower than in August last year. Clearly, those betting against the company called it right and made a lot of money in the process. 

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Today I’m turning my attention to another two private investor favourites – polyhalite miner Sirius Minerals (LSE: SXX) and AIM-listed fast fashion giant ASOS (LSE: ASC) and asking whether something similar might happen. 

Funding concerns

Based on the short tracker website, 7.3% of shares in Sirius are currently being shorted. That’s still less than that of troubled firms like Debenhams and Metro Bank (10.4% and 11.2% respectively) but significant enough to make me take another look at the company.

As my Foolish colleague Roland Head mentioned last week, the stock has been on a downward trajectory for some time. Although some of this can probably be attributed to worries over slowing global growth, a lot will be the result of concerns over getting sufficient funding to complete the mine build and get it into production.

Last week, Sirius revealed that it was now considering an alternative financing proposal –submitted by a “major global financial institution” — to replace the one it had been working towards since 2016. The company added that it would be looking to obtain firm commitments for this new plan (and any additional financing) before the end of April.

Somewhat understandably, the stock jumped on the news. However, it’s worth noting that short-seller interest has increased in the last few days too, possibly because those betting against the company believe that securing the cash will still take longer than expected. 

While always a high-risk stock, the next few weeks are clearly of crucial importance for the company’s future. The rewards for investors could be massive but anyone thinking of buying should definitely go in with their eyes wide open. 

Another profit warning coming?

Things have hardly been great for holders of ASOS over the last year either. Priced over 7,500p in mid-March 2018, the shares — like those of Sirius — have now fallen 60% in value.

At the time of writing, 6.8% of the stock is being shorted. Since short sellers face technically unlimited losses if the price rises (hence the need for them to be extremely confident about their research), that’s certainly not something those still holding should ignore.

One explanation is that the shorters think ASOS is likely to warn on profits again.

Back in December, the company shocked the market by stating that it now predicted sales would grow by 15% this year (rather than the 20% to 25% previously expected) and that the already-low 4% operating margin would halve.

There’s an old stock market saying that profit warnings tend to come in threes. With still no resolution to Brexit and the knock-on effect this is having on consumer confidence, it’s certainly possible the company’s trading update next Tuesday could contain more bad news. 

Since we can’t know for sure, I’ll continue to give the stock a wide berth, especially as it trades on a still-eye-watering 57 times forecast earnings. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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