With volatility reasonably low and markets generally at high levels, it's a tense time to be a short seller, someone who bets that the price of share will fall. Still, there are always opportunities for a strong share price reaction to be profitable. This was the case with fashion retailer Asos, whose shares slumped on a profit warning and the exit of the chief executive.
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. This month has seen a raft of new short positions in companies like Hipgnosis (SONG) - which featured in our round-up of music royalty stocks and has risen 20% since its 2018 float and are up 2% this year. The position of 0.64% was taken out by BlackRock in early October, according to the FCA register. New positions in other companies include Marshall Wace’s 0.60% short in cycle retailer Halfords (HFD), whose shares are off 23% in the last six months. Four new short positions have been taken out this month in Domino’s Pizza (DOM), a name often seen on the most shorted list. These new shorts take the total interest in Domino’s shares falling to a chunky 3.3% of shares. Odey Asset Management has also taken out a new position of nearly 3% in Metro Bank (MTRO), according to the register, which brings the high street banking disruptor back into the most shorted list. Metro Bank’s shares are off nearly 10% this year, and have fallen significantly over five years.
When we last looked at the most shorted stocks in August, Cineworld was top of the list with 7.68% of its shares shorted. In the intervening period, short interest in the cinema operator has actually increased to 8.28%, even as the company enjoys the box office success of much-delayed Bond outing No Time to Die (the company blamed a shortage of blockbusters last year. The cinema operator’s shares have been on a bumpy side similar to a Bond car chase this year. Shares doubled in two months from 61p at the start of the year, only to retrace this levels over the summer months. A brief sortie above 80p was shortlived and the shares are now around 60p again. Cineworld cinemas re-opened in May in England this year and by early September all UK and Ireland outlets were open. Shares are up nearly 10% since the start of the year after a big slide in 2020.
Another company re-entering the top 10 is digital commerce company Network International (NETW), which has nearly 4.5% of its shares shorted. Supermarket Sainsbury’s (SBRY) remains in the top 10 but has dropped down from third position to seventh.
Looking at the list in terms of share price performance alone, there is a wide dispersion among the most shorted list. Short interest in oil exploration firm Tullow Oil (TLW) has actually increased since our August round-up, but the shares are 86% this year. In contrast to last year’s slump, oil prices have surged this year amid tight supplies and strong demand, which have boosted shares in oil producers globally. Sainsbury’s (SBRY) has dropped down the shorted list from third to seventh as shares have risen this year amid increased interest in sector takeovers after the Morrisons buyout.
Top 10 Most Shorted FTSE Stocks
What is Short Selling?
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.
