Much has been made this week of the FSA’s introduction of a regularly updated list of the most shorted stocks in the UK – and who is shorting them. Brought in as part of the EU’s new disclosure regime for short selling, it’s the sort of list that offers journalists in particular an almost endless pot of feature ideas.
Unsurprisingly, there has been no shortage of venom directed at the ‘ruthless’ hedge fund traders behind these shorts, and the chaos they can cause. That’s one way to see it - although as James Montier has argued: "Vilifying short sellers is the equivalent of punishing the detective rather than the criminal."
Under the new rules, investors holding short positions worth more than 0.2% of a company’s share capital have to tell the regulator. When the position exceeds 0.5% of the shares, then the details are made public. While this sort of disclosure may add more transparency to these sorts of trades, the usefulness of the list is still limited by its opacity. For instance, the list doesn’t easily distinguish between when short positions are opened, closed or changed. Inevitably it also only tells one side of the story; institutions can hold long and short positions simultaneously – so this list might not give an accurate view of what each money manager really thinks. Be that as it may, what does emerge is a general view of the types of companies and sectors that professional traders think are heading for trouble – and retailers really stick out.
In a fragile economy where consumers are still struggling, it seems that short sellers think Christmas will bring only disappointment to some of the biggest names on the High Street. Among them, Home Retail (LON:HOME) (the owner of Argos and Homebase) and Mothercare (LON:MTC), the children’s merchandise retailer, are notable. Both are currently attempting major reorganisations in the face of changing markets and stiff competition. In response, both have seen their share prices rise in recent months. So could the shorters have got it wrong?
The recent experience of electronics chain Comet proves that failure to adapt to changing consumer habits can be fatal. At Home Retail, whose Argos website is the second most visited internet retailer in the UK (after Amazon), the nettle seems to have been grasped this year. The age-old catalogue model looks destined to be recycled into a far more internet-friendly approach, albeit with stores. One of the questions will be whether the group can get that transformation done quick enough and in a way that consumers respond to. Currently, more than 11% of its stock is being shorted, which suggests that many traders think it can’t do it. But the shares have displayed double-digit relative strength against the market for 12 months even in the face of declining sales figures last year. The stock has risen by around 18p to 111p in just over a month.
Mothercare meanwhile, has been performing much better abroad than at home in recent years. While the brand holds kudos internationally, its portfolio of domestic out-of-town stores has been letting it down. As the father of two young children, I confess that Mothercare has in the past been a great place to check out buggies and suchlike before buying them cheaper on the internet. The group has long been trying to slim down its UK store base and the introduction of a slicker web site has helped to get the UK business growing again – which sent the shares from 200p to 300p last month. That won’t be welcome news to the two funds that are currently shorting an aggregate 3.76% of the company’s stock.
Like most of the retailers on the FSA short selling list, Christmas is going to be vital this year for Home Retail and Mothercare (as it always is). On the upside, both groups seem to have at least some idea of where their problems lie and are trying to fix them. So the question is whether they can do enough to reshape their businesses and continue to win the faith of investors or whether the shorters, sensing inevitable decline, have called it right.
For those that are interesting in understanding shorting in more depth, we discuss some of the better approaches to doing it here and here. Of course, it’s important to be aware of the risks of short selling. Unlike long investing, there’s the potential for (theoretically) infinite losses coupled with the risk that comes with the use of leverage. Interestingly, in the year to date, the five short screens that we’re tracking are all in negative territory in the year to date, with the worst (or rather best) performing screen down 23.5%. None of those screens mentions Mothercare or Home Retail.
Filed Under: Short Selling,