Thousands of shareholders were hit by the demise of construction company Carillion last month, but there were also plenty of investment winners too. Hedge funds had been taking negative positions on the stock ever since its bid to take over fellow outsourcer Balfour Beatty (BBY) collapsed in 2014 - betting on its failure.
By the time it filed for compulsory liquidation, Carillion was the most-shorted company in the UK, with around a quarter of its shares out on loan at the beginning of July. Profits on that trade were in the hundreds of millions.
With Carillion out of the way, short sellers are looking around the rest of the market to find the next target.
Luke Newman, manager of the Morningstar Bronze Rated Janus Henderson UK Absolute Return Fund, was one who bet against Carillion. He also holds a short position on Capita (CPI), which recently saw half of its value wiped off after a damaging profits warning.
Newman is currently looking to find other structurally challenged businesses or companies with excess levels of leverage to short. “Our short positions are currently receiving a great deal of our focus,” he continues.
Mark Swain, manager of the Smith & Williamson Enterprise Fund, says now in the UK is “as fertile an investment environment for funds which can go both long and short as we have seen since the peak of the eurozone financial crisis in 2012”.
His fund ended 2017 with a net exposure to equities of just 14%. That’s near the bottom end of its historic range. “Our net exposure is currently at this low level because there are so many shorting opportunities,” he explains.
Using data from the Financial Conduct Authority, we outline the five most popular short positions.
Debenhams (DEB)
Retail is certainly an area of interest for short sellers – six of the 10 most shorted stocks are either retailers or supermarkets. Around 14% of Debenhams’ stock is out on loan, with Odey Asset Management taking the largest position at 5.1%.
A profits warning on just the third trading day of 2018 saw 15% of the share’s value wiped off. At 29p, the share price is down three quarters since its peak back in November 2012. The high-street staple said fewer customers came through its doors over Christmas, meaning it would miss full-year profit forecasts.
It’s now set to close 320 store manager jobs across the country as part of a £10 million cost savings plan, it was reported on Thursday.
Provident Financial (PFG)
A Neil Woodford and Mark Barnett favourite, doorstep lender Provident Financial had a shocker in 2017. Two damaging profits warnings in the space of just two months, prompted by a botched overhaul of its consumer credit division, saw its shares slide 80% from £28.65 in mid-June to 590p in mid-August.
While it looks to have steadied the ship for now, it’s only 16 months ago it was above £34. Now, 135 of the stock has been borrowed by hedge funds betting it’s only going to go lower. Lansdowne Partners has 2.19% of that, with AQR Capital Management at 1.69%.
Pets At Home (PETS)
Another on the list with a recent profits warning to its name, retailer Pets at Home is down 23% in just four months.
It’s been in turmoil recently, with many analysts worrying about the size of its net debt, which stands at around £160 million. Chief executive Ian Kellett and non-executive director Nicholas Gheysens quit in November.
Gheysens is a board member at private equity giant KKR, which formerly owned Pets and took the company public. Earlier this month it sold the last tranche of its shares in the company.
Those betting against Pets include Coltrane Asset Management, Kontiki Capital Management and Portsea Asset Management, all of whom rent over 1.6% of the stock. In total, 11.6% is out on loan.
IQE (IQE)
This time last year, investors were excited about chip maker IQE. It was poised to benefit from a rise in demand for semiconductors, with its products reportedly being used in Apple’s iPhone 8. The stock re-rated almost fivefold from 38p at the end of 2016 to touch 181p in November 2017.
But it’s momentum has reversed quickly, hitting a seven-month low of 89p earlier this week after damning research notes were published by ShadowFall Capital & Research and Muddy Waters Capital.
The latter’s report, published on Thursday, slammed IQE as “an egregious accounting manipulator”. Shares initially fell by 19%. IQE hit back immediately, claiming the information was “either factually inaccurate or has previously been disclosed” and investors seemed placated.
Still, 11.4% of the stock has been borrowed, with Marshall Wace having the biggest short position at 4.07%. Coltrane Asset Management has 2.8% and Ennismore Fund Management 1.63%.
Marks & Spencer (MKS)
Finally, the second veteran of UK high-streets, Marks & Spencer. Just less than 11% of Marks’ stock is out on loan. Lone Pine Capital, Pelham Long/Short Master Fund and Marshall Wace hold the biggest positions.
It’s no surprise Marks is so heavily bet against. The stock is currently at its lowest position since the immediate aftermath of the EU referendum. The last time it was lower was back in 2009.
John Bennett, manager of the Morningstar Bronze Rated Henderson European Focus Trust (HEFT), says M&S was “born in another era”. “It’s of its time… you would never invent it today,” he adds. “Physical retail is absolutely dying.”
Third-quarter 2017 trading was “mixed”, chief exec Steve Rowe said in January as general merchandise and food sales fell 2.85% and 0.45% respectively.
Helal Miah, investment research analyst at The Share centre, thinks “the state of M&S is a growing concern”. “The ongoing restructuring still isn’t bearing fruit and investors should naturally be concerned.”
Sellside broker Investec rate the stock a ‘sell’, with analyst Kate Calvert explaining she thinks Rowe’s turnaround plan is “no more than a profit stabilisation strategy”.
