2022’s volatile markets present opportunities for those looking to take advantage of changes in valuations, whether they be companies trading cheaply, or those looking expensive. It’s these last group of investors we are focusing on in our latest update on short sellers.
The Financial Conduct Authority (FCA) produces a daily list of the most shorted stocks. It gives an insight into what professional investors think about particular sectors, and sometimes gives an early warning sign of a company in trouble. That could be helpful to retail investors if they’re looking to sell out of an underperforming stock.
Last time we looked at this list, in January 2022, cinema operator Cineworld (CINE) was top of the list, and it remains in the number one slot in early June with more than 8% of its shares beings shorted.
Early this year, Russian gold miner Petropavlosk (POG) was the second most shorted FTSE stock; its share price was down nearly 20%. This was before the invasion of Ukraine on February 24. Now the shares are off more than 90% this year as the company has been caught up in the fallout from the conflict.
This fall meant that Petropavlosk was ejected from the FTSE 250 in the March reshuffle. Some experts had been predicting war at the start of this year but Putin’s move caught financial markets on the back foot. Setting morality aside, however, for those shorting the shares in early 2022, this would have been a lucrative trade. Short-lived rallies in companies like Petropavlosk and Polymetal (off 81% this year) suggest some investors are willing to take a punt on these stocks, despite the jeopardy inherent in buying Russian companies (fellow commodity stock Evraz had its shares suspended on March 22).
Retail is a dominant theme on the top 10 list, with names like Kingfisher (KGF), Naked Wines (WINE), Fevertree Drinks (FEVR), and Currys (CURY) proving conspicuous. Outside of the top 10, we find WH Smith (1.62% of shares shorted), Superdry (1.29%), B&M (3.83%), Made.com (2.64%), Next (1.92%), former investor darling Ocado (1.95%) and Sainsbury’s (4.33%).
Fast fashion shares Boohoo (BOO) and ASOS (ASC) are now in the top three, with 7% and nearly 6% of their shares shorted. ASOS is significantly undervalued, according to Morningstar analyst Jelena Sokolova: its shares trade at £15, but have a fair value of £44.10.
With inflation soaring and a recession supposedly on its way, short sellers are focusing heavily on consumer-focused stocks, with the assumption they have further to fall. While investing in momentum stories like these is often self-fulfilling, such trends can turn quickly. Oil stocks were heavily shorted in 2020 and 2021 but have returned to favour this year, triggering an exit from short positions.
Airlines Turbulent
War-adjacent stocks like airlines also make it on to the long list of shorted stocks. These include British Airways owner IAG (IAG), whose shares are off nearly 20% this year, 3.5% of its shares shorted, with a flurry of new positions taken out in May.
Other airlines on the list include Eastern Europe-focused Wizz Air (WIZZ), which has 3.25% of its shares shorted, and easyJet (EZJ). We recently wrote about the disconnect between travel stocks’ share prices and the uplift in the industry as tourists get back on planes. All three of these stocks are rated 5 stars by Morningstar.
Royal Mail (RMG), which has recently been demoted from the FTSE 100 in the latest reshuffle, has entered the top 10. Shares in the letters and parcels firm went on a very strong run from March 2020 to June 2021, rising 376%, but have fallen 40% this year as the lockdown parcels boom has ebbed away.
Looking at the top 10, there are some hefty year-to-date falls, and that needs to be put into context of the wider market: the FTSE 100 is up nearly 2%, the FTSE 250 is down 14% and the All-Share, which many active funds are benchmarked against, is 1.25% lower since the start of the year.
How Does Shorting Work?
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.
To do this, you borrow them from specialist firms like brokers, sell them 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 an early warning sign of problems ahead that can be picked up on by all.
Firms that have attracted short sellers in the past include Thomas Cook and Carillion in the UK, and the scandal-hit 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 alongside specialist trading firms and hedge funds, 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. Other familiar names on the FCA’s list include Marshall Wace, Citadel Advisors and GLG Partners.
Last year, the regulator changed the rules for declaring short positions, effectively lowering the bar for transparency. Investors now need to notify the FCA when their position in a company exceeds 0.1% of its issued share capital (previously the threshold was 0.2%). Short sellers must also notify the FCA every day about who they are shorting and the size of the short position.
