These are turbulent times for shares, particularly so in earnings season, when price moves can be extreme if a company delivers unexpected and unwelcome surprises to investors.
We’ve seen that recently in the case of Meta (META), whose shares slumped over fears over growth prospects at its metaverse division. Amazon's (AMZN) shares also tumbled as it lowered guidance for sales in the final quarter of the year and warned about softening consumer spending. But market volatility can also work the other way: Ocado (OCDO) spiked nearly 40% on one day after announcing a venture in South Korea. So these conditions should be favourable for 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. This is the flipside of people "buying on the dip", which we looked at recently. So price moves can trigger differing reactions: some people see this as a chance to bail out, others to buy shares in great companies at temporarily cheap prices. Some of the companies on the top 10 most shorted list have seen some chunky falls this year – Naked Wines is the worst with an 82% fall but Ashmore is the smallest faller with a loss of 26%.
Cineworld – A Shorting Case Study
Only over the long term do you know if your instinct was right. One case study of when short sellers were right was cinema chain Cineworld, which had been at the top of the most shorted list for much of this year.
Last time we looked at this list in August 2022, Cineworld (CINE) was number four, having been the most shorted for much of this year. At the time shares were down more than 34%, with more than 7.54% of shares being shorted (an explanation of how this works is below). Since then the company has filed for bankruptcy in the US and shares are down nearly 80% in the year to date – shares can still trade during this process but can be suspended, as often happens in the UK. (Cineworld shares are listed in London and New York.)
Cineworld has just reached a settlement with lenders in the States and the shares have rallied. But whatever the final outcome for investors in the company, short sellers will have made some serious money. For the record, no new short positions have been taken out in Cineworld since August.
Looking at the FCA’s current list, there are some familiar names from August and some new entrants to the top 10 most shorted.
Online fashion retailer Boohoo (BOO) is now the most shorted, leapfrogging B&Q owner Kingfisher (KGF), which was number one last time we looked at the data. Share price declines have deepened for Boohoo and ASOS in the last few months after profit warnings amid weakening consumer demand during the cost-of-living crisis.
Morningstar has reduced its fair value estimate for ASOS to £33.60 after worse-than-expected results, but at around £6 per share, the company is still significantly undervalued, according to analyst Jelena Sokolova.
It's obvious that consumer-facing companies are at the sharp end of the inflation crisis. Six of the top 10 most shorted companies can be described in this way – the retailers mentioned before: Naked Wines, Fevertree Drinks, Kingfisher and Currys. These cover a range of sectors, from from fast fashion to drinks, with DIY and electricals in between. So shorting attracts those looking for weak sentiment, but there are company-specific issues at play too.
Asset Managers and Airlines
The list is also bulked with investment managers, including Abdrn (ABDN), emerging markets specialist Ashmore (ASHM) and new entrant Hargreaves Lansdown (HL).
Hargreaves shares are down 42% this year as the lockdown retail trading boom peters out amid volatile markets. Last month the company’s chief executive Chris Hill announced his departure in 2023, and Hargreaves is also facing fresh litigation over the collapse of the Woodford Equity Income fund in 2019, which it sold to investors.
Looking away from the top 10, airlines easyJet (EZJ) and IAG (IAG) also have hefty short positions built up against them, as has Ocado (OCDO), whose shares spiked this week on news of its big Korean grocery technology venture.
In Ocado’s case, there may have been a "short squeeze" at work here after a prolonged share price decline. This happens when traders bet on the opposite outcome to a share price fall, effectively testing the conviction of the short sellers. Sometimes the squeeze needs a trigger event like a piece of "good news" as with Ocado’s. But a daily share price gain of nearly 40% for such a large company is still unusual even in today’s jumpy markets.
For subscribers to recent IPOs, to see the likes of THG (THG) and Deliveroo (ROO) on the list will be an uncomfortable experience. But short sellers are just following momentum, with THG off 72%, and Deliveroo down 69% in the year to date.
Crypto hype stock Argo Blockchain (ARB), whose shares are off nearly 92% this year, has also had a new short position initiated.
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. Sometimes a company on a short list may have terminal problems, other times it’s just a temporary loss of confidence prior to a turnaround, or a buyout, which takes the company off the market.
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.
