Next week will mark a year since outsourcer Carillion went into liquidation, costing tens of thousands of jobs, and millions of pounds in investors' and debtors' cash.
But the collapse provided a huge boon for hedge funds that had been savvy enough to short the troubled firm. Shorting is borrowing stock today in order to buy it back at a lower price at a future date – profiting from a share price fall.
The warning signs were there, they claimed in the wake of the collapse; ever-declining margins, excessive financial leverage and many other red flags should have sounded alarm bells.
While some other firms crack under pressure from short sellers, such as retailer Debenhams, others have confound the pessimists.
The biggest failure of the hedge funds was online grocer Ocado (OCDO), which had long been a target of their negative outlook. But a transformational deal signed with Kroger (KR) in May saw shares more than double by late July, leading many to close out their short positions and bank huge losses. The lesson? Not all stocks on the short list are destined for doom.
Below, we round up the five most-shorted stocks in the UK market using data compiled by boutique investment manager Castellain Capital using data from the Financial Conduct Authority.
Arrow Global (ARW)
Debt collector Arrow Global shot to the top of the charts through the course of 2018. Arrow floated on the main market in late 2013 and had a good run between mid-2016 and mid-2017, more than doubling in value.
But it’s been far from plain sailing since, and 2018 proved their annus horribilis as the share price sunk by almost two-thirds to well below its initial offer price of five years ago.
Described in September by broker Peel Hunt as “the most contentious stock in our coverage”, the firm has been plagued by problems – including changes in management, falling returns and lack of cash generation – leading to a loss of confidence.
Currently, 12.2% of the £323 million firm’s stock is out on loan, with the largest short-sellers including ByBrook Capital, Portsea Asset Management and CPMG.
However, fund managers who are long Arrow are still keeping the faith. “Some investors have questioned its ability to acquire further books of business at attractive prices,” explains Jonathan Brown, manager of Invesco Perpetual UK Smaller Companies (IPU).
“Whilst the cost of acquisition has increase dover the last couple of years, the returns the company can achieve remain attractive, so we have maintained our holding.”
Marks & Spencer (MKS)
The retail sector is, unsurprisingly, fertile hunting ground for short-sellers and M&S has been a perennial target for more than five years.
The high-street stalwart’s share price is currently only 50p off lows not seen since the depths of the financial crisis in late 2008 as bricks and mortar-focused offerings continue to struggle against online rivals.
As a result, 11.5% of its stock has been borrowed, up from just under 11% when we last looked in February last year.
The dividend stalwart, currently predicted to yield 6.5% in 2019 according to AJ Bell, had seen its share price hold steadily through 2018 until it announced sales in the food division were declining faster than the market previously expected. Shares are down 18% since late November.
The most prolific short-sellers of M&S, with positions above 2%, include Marshall Wace and the Pelham Long/Short Master Fund, while Lone Pine Capital and BlackRock have more than 1% on loan.
Plus500 (PLUS)
Contracts for difference provider Plus500 had a storming first half of 2018, surging by 125% in the year to 9 August.
It was boosted by news the European Securities and Markets Authority would crack down on CFD providers, an investigation the firm said it has always backed. The thinking was that it would be bad news for the smaller, more shady operators and work in favour of the larger firms, like Plus500 and IG.
But the final four months of the year were tougher for Plus500 and the share price is down by a quarter, after revenues fell and performance waned.
It now has 11.45 of its stock out on loan, with Sessa Capital, Highline Capital Management and Rubric Capital Management all holding short positions in excess of 1.3%.
There are buyers, though. Mark Barnett is one, and added the stock to his Edinburgh Investment Trust portfolio through the course of the year.
Ultra Electronics (ULE)
It wasn’t long ago that defence companies were being tipped to flourish and Ultra Electronics, which makes electronic systems for the defence and aerospace markets, was the darling of investors’ eyes.
A new boss had talked the firm’s prospects up for a long time, and fund managers had bitten, sending shares up 50% in the space of eight months from a previous eight-year low in November 2017.
But since August, the stock has fallen back 11% as analysts begin to forecast the firm missing expectations down the line. “2018 full-year results are likely to disappoint,” investment bank Barclays said last month.
Today, 11.15 of Ultra’s stock is out on loan, with Thunderbird Partners having borrowed 2.2%, followed by AKO Capital at 1.97% and SFM UK Management and Naya Capital Management at just over 1.5%.
One top investor who is backing the company as a “hidden defensive” play that “should show resilience in a weaker economic environment” is Alex Wright, manager of Morningstar Silver Rated Fidelity Special Values (FSV).
Debenhams (DEB)
Rounding out the top five is another high-street retailer, Debenhams. The past 12 months has been the firm’s worst year yet, starting off with a huge profit warning and seeing the share price decline by 85%.
“Debenhams has continued to face problems as it is constrained by long leases, poor old-fashioned stores and too much space,” says Nick Burchett, UK equities manager at Cavendish Asset Management.
But there could be a way forward. Management have some initiatives in the pipeline and an ambitious cost-saving strategy. Should they pay off, Burchett adds, “Debenhams will have made progress towards overcoming the circling bears and strategic buyers of the debt”.
“However, it hasn’t quite left the intensive care room yet, so we certainly can’t expect it to be running a marathon anytime soon.”
Shares currently change hands for 5p, so the stock is almost worthless, with Sports Direct owning almost a third. As a result, most short sellers have closed out their positions showing big profits and just over 10% is currently on loan, compared to 14% this time last year.
Odey Asset Management is keeping Debenhams in the top five currently, with 7.21% in its hands. The second largest bettor against the company is UBS Asset Management with 1.66%.
