With the UK stock market hitting new highs for the year in August and companies like Morrisons and Meggitt being bought out, it’s a tense time for someone who bets on company share prices falling. We’re taking another look at the most shorted stocks on the FTSE.
The list of the most shorted stocks, which is updated daily by the FCA, often gives an insight into what professional investors are thinking about particular sectors – and sometimes gives an early warning sign of a company in trouble. But coronavirus has made life even harder for short sellers, with some sectors falling out of favour (airlines, hotels, oil) but then posting strong gains as economies bounced back from the pandemic. As many of the UK’s listed companies are dependent on the consumer recovery continuing on track, any setback in terms of further national lockdowns or restrictions may throw up more opportunities for short sellers.
Cineworld Share Price Chart Year to Date
Last time we looked at the FCA table Cineworld (CINE) was the most shorted stock on the FTSE, with 7.44% of the company’s shares out on loan. That percentage had risen to 7.69% by the middle of August, helped by a new position taken out by Whitebox Advisers, an alternative asset management group. (The FCA register shows the percentage shorted and when the position was taken out). Cineworld’s shares are a good illustration of how recovery plays have faded as summer has gone on, with the price back to where it started in January at 61p. Those who bought at the start of the year and sold in March would have made a tidy profit as the shares spiked at 122p, but the price has been on the slide since.
Ultra Electronics (ULE) is a perfect example of short sellers being on the wrong side of the trade. The aerospace and defence company was number seven on our list last month with 3.5% of the shares being shorted. But a takeover from rival Cobham has sent the shares up more than 60% this year.
Supermarket Morrisons (MRW) had been on the most shorted list for many months but has unsurprisingly dropped off after a takeover battle between private equity giants has driven the shares up around 60% this year. Still, rival Sainsbury’s (SBRY) is the second most shorted stock on the FTSE even though private equity buyers could pounce again for a listed grocer. Morningstar retail analyst Ioannis Pontikis thinks Sainsbury’s is a likely target after Morrisons, long perceived as the weakest of the Big Four supermarkets, goes private. According to the FCA regsiter, three new short positions were taken out on Sainsbury’s in July, which suggests some investors expect the shares to fallen even amid the takeover frenzy surrounding Morrisons.
Most Shorted Stocks on the FTSE
Oil services company Petrofac (PFC) has re-entered the top 10 most shorted list, with a share price fall of 25% this year. Oil companies have been well represented on this list since the pandemic but the performance this year has been varied: Tullow Oil (TLW), which lost more than 50% of its value last year is up by a similar amount this year. IN terms of new entrants to the top 10, Petrofac, Metro Bank (MTRO) and commercial property firm British Land (BLND) are new entrants, displacing Network International (NETW), Ultra Electronics and Domino's Pizza (DOM).
Why Short Sell?
Short-selling can be a highly profitable way to exploit the falling share price of companies in distress. It involves selling shares you don’t own to make a profit from the fall in the price. You borrow them from specialist firms like brokers, sell those shares at the current market price with the hope of buying them back at a cheaper price later. This active trading strategy is usually only undertaken by professional investors, but often provides a warning sign of problems ahead for companies – the list of companies that have attracted short sellers in the past include Thomas Cook and Carillion in the UK and Wirecard in Germany. Shorting tends to attract other shorters, however, and some argue it only hastens the demise of a company.
To an outsider, short sellers may seem like shadowy figures in the investment industry. But some of the biggest asset managers are involved in shorting, including BlackRock, Jupiter and JP Morgan. Often short positions can be taken out to cover “long” positions as part of everyday risk management, where fund managers are managing their significant stakes in companies.
Earlier this year, the City regulator changed the rules for notifying it about short positions, effectively lowering the bar for transparency. This means that an investor needs to notify the Financial Conduct Authority when their position in a company exceeds 0.1% of its issued share capital (previously the threshold was 0.2%). Short sellers must notify the FCA every day about the size of the short position and the company that is being shorted.
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