Despite posting a strong finish to 2021 and forecasting strong trading this spring and summer, theatre operator Cineworld (CINE) is still the most-shorted UK stock according to daily data from the FCA (Financial Conduct Authority).
Short sellers are also targeting other companies which are dependent on discretionary spending such as retailers.
LIGHTS OUT?
Sifting through the FCA data its is clear professional short sellers such as hedge funds are betting on disappointing results from companies which rely on non-essential spending.
Short selling involves borrowing a company’s shares from institutions and selling them in the market in the anticipation that the price falls and the seller can buy them back and make a profit.
In the case of Cineworld, where 8.1% of the shares have been borrowed by short sellers, the concerns are less about earnings and more about its enormous debt position and a pending legal case.
According to Refinitiv, the company ended 2021 with $8.9 billion of net debt and its credit score is just one on a scale of one to 100 meaning it is highly likely to default.
The company also faces a multi-billion dollar fine in a dispute with Canadian cinema chain Cineplex, which it is currently appealing as it doesn’t have enough cash to meet the claim.
RETAILERS IN FOCUS
Close behind Cineworld with 5.7% of its shares on loan to short sellers is online fashion group Boohoo (BOO:AIM) which has lost 75% of its market value since the shares peaked in June 2020 after lockdown initially boosted sales.
The firm has faced damaging claims of modern slavery and repeated profit warnings due to falling sales and more recently a spike in supply chain costs.
Electronics chain Currys (CURY) is the next most-shorted stock with 5.1% of its shares on loan, followed by DIY retailer Kingfisher (KGF), online electricals seller AO World (AO.) and online drinks firm Naked Wines (WINE:AIM).
With household fuel bills doubling in some cases from today as the energy price cap is lifted, and with consumers already facing rising food and petrol prices, hedge funds obviously feel these companies are the most exposed to a downturn in discretionary spending.
LEAST LOVED
Given that their job is to promote stocks, broking firms tend to shy away from putting a sell recommendation on companies especially if they have a corporate relationship.
Therefore, rather than look at the stocks with the most sells it can be more instructive to look at the stocks with the least buys.
In contrast to the shorts, the least loved stocks as measured by the number of buy recommendation divided by the number of analysts covering the company is a complete mixture.
Just two out of 24 brokers, ie less than 10%, who cover plumbing supplies firm Ferguson (FERG) and fashion house Burberry (BRBY) have a buy recommendation on either stock.
It is a similar story for miner Rio Tinto (RIO) and media giant WPP (WPP) with both garnering just two buys out of 23 recommendations.
There is even a handful of stocks with no buys at all, including Admiral (ADM), Hiscox (HSX), Meggitt (MGGT), Schroders (SDR) and Severn Trent (SVT).
