There’s been a lot of corporate drama worldwide since we last reported on UK short positions in February. Credit Suisse was rescued by UBS, while March saw a localised US banking crisis that claimed a number of victims, including Signature, First Republic and Silicon Valley.
These events provoked alarm among global investors, an emotion that has subsided – but not entirely vanished – from the market's radar.
The ongoing feeling that something bad might still happen to stocks and sectors is great for short sellers, but has again brought the practice some heat. JP Morgan chief executive Jamie Dimon has even called for a ban on short selling US banks. JP Morgan bought one of the stricken banks, First Republic, and has just cut 1,000 jobs at the acquired firm. While shorting may not be banned in the UK, there’s a danger the public may lose access to a daily record of positions under proposals by the current government.
Another boss with a long-standing beef against short sellers is THG’s Matt Moulding. But the shorts have been squeezed here with shares in the ecommerce platform up 30% this year after a (now-abandoned) takeover approach. Two years ago the shares were trading above £6 after an IPO at £5, but they are now 60p. Qube Research and Technologies has just taken out a new short, worth 0.60% of the shares, on May 25.
Along with short sellers themselves, social media has also been blamed for accelerating the demise of these firms – in terms of propagating rumours of financial distress. But again the counter argument is that short selling just speeds up the inevitable, and social media acts to expose flaws quickly that are going to get found eventually.
In Credit Suisse’s case, investors are focusing their ire on the Swiss regulator and how bondholders were treated rather than those who held common stock. Those who shorted Credit Suisse’s shares would have cleaned up, of course – but there were many opportunities for long investors to exit.
Crises of confidence came and went at Credit Suisse but a look at the long-term share price chart shows an almost-inevitable-looking decline. UBS paid 0.76 Swiss francs per share for its rival but in 2020 they were worth over 10 francs.
Pantomime Villains?
At the opposite end of the spectrum to Jamie Dimon, outspoken UK short seller Barry Norris, who runs the Argonaut fund. He gives short shrift to the idea that those on the wrong side of capitalism’s rough and tumble should suddenly start wanting the rules changed. Norris also expects further collapses this year in the banking sector.
"After losing their clients' money, bank bulls, including bank management, want to ban short sellers and even 'prosecute' sceptical voices for the crime of making their concerns public," he says.
"Now money has been made expensive, it is suddenly unfair that share prices can go down as well as up. It is much easier to blame the pantomime short-selling villains than own up to your own stupidity."
He continued:
"Every company on the stock market has made a choice to subject themselves to public scrutiny. This 'public' includes investors who short stocks to hedge their market risk to differentiate their returns from most funds that are solely reliant on market direction.
"Assets controlled by short sellers are tiny in comparison with traditional investors, and the failed banks weren’t even popular shorts, meaning that the idea of share prices collapsing under the weight of short selling is a convenient myth."
Not in Fashion
We review the daily register every three months and the there are some recurring names on the list (Boohoo, ASOS, Hammerson). The top 10 does shift a fair amount, however.
Ocado (OCDO) has made a dramatic entry into the second position after a 42% share price fall this year, a move that almost triggered its demotion from the FTSE 100 in the latest reshuffle. Not many years ago the stock was the best performing in the FTSE 100 so this is a fall from grace, and a sign of investor impatience with "jam tomorrow" stocks.
Online fashion retailer ASOS (ASC) is now number one on the list, and is one of four companies with 5% of shares being shorted. The market didn’t like the company's first-half results, with disappointing revenue and profits and a forecast for free cash flow at the lower end. Morningstar analyst Jelena Sokolova expects to lower the fair value estimate (currently £33.60) but still views shares as cheap at current levels, £3.56. In fact, ASOS is one of the most undervalued European stocks under Morningstar coverage.
Shares are off a chunky 34% so far this year but it’s not the biggest faller on the most shorted list. One other notable feature of our list is the dispersal of returns so far this year.
Four of the top 10 are showing positive figures, with cruise liner Carnival (CCL) the standout with a near 35% gain. The company’s shares were hammered during the pandemic as lockdowns paused travel. The bounce seen this year looks impressive but comes after a choppy 2022 for the shares.
New Positions
Some notable new short positions in May include NatWest (Marshall Wace,0.70%), Persimmon (GLG Partners, 0.60%), and Sainsbury’s (BlackRock, 2.09%). While the Bank of England recently upgraded their growth forecasts for the economy this year, but it’s clear banks, housebuilders and retailers have key exposure to the fortunes of UK PLC.
The bear case for the UK is relatively easy to make at the moment, with inflation sticking around, interest rates rising, a general election looming, and relatively weak growth. Things may turn out better than expected, of course, but uncertainty and economic stress lead to volatility, which are fertile conditions for short sellers.
Much of the current anxiety is focused on the property sector, particularly commercial real estate. We recently look at volatility in share prices of real estate investment trusts (REITS) as part of our income special report week. Despite the recent stabilisation in values this year – recovery is probably too strong a word at this stage – it’s not surprising to see a number of REITS on this list. They include Supermarket Income REIT (SUPR), British Land (BLND), Primary Health Properties (PHP), Hammerson (HMSO), Great Portland Estates (GPE) and Land Securities (LAND).
Some of these are recent short positions too – GLG Partners took out a 1.46% short on Primary Health Properties on May 24, and the same firm went short on Supermarket Income REIT on May 26, albeit a more modest 0.50%.
Given the hefty share price falls last year and ongoing stress in the sector, this could still be a profitable trade for short sellers in the near term. Primary Health Properties is down 11.5% in share price terms in the year to date, Supermarket Income is off 22%, but Hammerson – which makes it into our top 10 – is actually up 3% after a 27% fall in 2022.
How Does it 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 shorting 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.
In 2021, the regulator changed the rules for declaring short positions, effectively lowering the bar for transparency. But there is talk that short positions will no longer be available in the public domain, while the practice itself will continue. A "call for evidence" as part of the official government consultation has just concluded and more information can be found here.
