It's not a list which many corporates would be happy to top, but Canaccord Genuity Wealth Management has today released a ranking of the 12 most shorted stocks in the UK.
Construction company Carillion topped the list, with 27.2 per cent of its equity having been shorted.
The dirty dozen
|The company||Percentage of equity which has been shorted|
|Carillion||27.2 per cent|
|Ocado Group||19.5 per cent|
|WM Morrison Supermarkets||16.1 per cent|
|Wood Group||12.3 per cent|
|Tullow Oil||12.2 per cent|
|Debenhams||12 per cent|
|Marks and Spencer||10.8 per cent|
|Mitie Group||10.6 per cent|
|Lancashire Holdings||9 per cent|
|Pets at Home||8.8 per cent|
|Sainsbury's||8.7 per cent|
|Hansteen Holding||8.3 per cent|
What is shorting?
Shorting is a process where short sellers – usually hedge funds and investment banks – look for a company they believe is overvalued and then work a profit from selling their shares.
The short seller “borrows” stock from a large institution, such as a pension fund, then sells it at the current market price in the hope that the share price will later fall.
This would then allow them to buy the stock in the future from the large institution at the lower price, turning a profit.
Short selling is “sometimes criticised by corporates who feel they are being picked upon unfairly by speculators hoping to benefit from declines in their share price”, according to Canaccord's Simon McGarry.
“But if short selling wasn’t allowed, traders with negative views of certain stocks would only be able to avoid them. Instead, short selling allows hedge funds and other sophisticated market participants to generate returns based on their negative views of a stock,” he explained.
The Carillion story
Canaccord's research took place just before Carillion announced a slew of bad news, culminating in the resignation of its chief executive, which caused its share price to plummet.
“The Carillion story just goes to show that where there is high interest from hedge funds, there is inherent underlying weakness in the company,” said McGarry.
“Given recent performance, in all likelihood the short positions have now been closed.”
He added that the hedge funds had been focusing on a variety of issues including a declining order book and decreased revenue visibility.
Added to this, there were fears that Carillion's balance sheet was becoming increasingly stretched due to a substantial pension deficit and the slow progress of the management's debt reduction plan.
“The hedge funds were hoping management would be forced to cut the dividend, leading to a sell-off in the share price, as yield hungry investors look elsewhere for a source of income. The hedge funds were right,” said McGarry.