Share trading is currently challenging in volatile markets. While some investors are capitalising by buying shares at reduced prices, others may be concerned about a potential stock market crash.
The process of ‘shorting’ stocks can provide a good insight into investor sentiment towards individual companies, as well as wider market trends. In its simplest form, shorting is a trading strategy based on an expected fall in a company’s share price.
As a result, investors might want to be cautious about buying shares in heavily-shorted companies due to the possibility of a future decrease in their share price.
So let’s find out more about the top 10 most-shorted UK companies.
What are the top 10 most-shorted shares?
According to trading data from ADVFN plc, these are currently the top 10 most-shorted shares on the London Stock Exchange.
Net short position
Cineworld Group (CINE)
Boohoo Group (BOO)
Network International (NETW)
AO World (AO.)
Naked Wines (WINE)
Alphawave IP (AWE)
The most striking trend is the dominance of the retail sector in this list, including Boohoo, Kingfisher, Currys, AO World and Naked Wines.
Tom Aylott from Trustnet reports that “Bets placed against these UK companies is a clear sign that investors expect a decline in retail activity as high inflation puts a strain on consumers’ spending.”
What can we learn about the most-shorted shares?
Let’s take a more detailed look at the most-shorted shares to see what they’re signalling about the trading outlook. I’ve excluded Carillion as the company went into liquidation in 2018.
Cineworld has featured regularly on the most-shorted shares list in recent months. And it’s proved a profitable trading strategy, with its share price falling by over 80% in the last two years.
Despite cinema footfall recovering after the pandemic, Cineworld’s share price has continued to slide by 19% in 2022. One likely cause is Cineworld’s potential £720 million legal bill over the withdrawal of its offer for Cineplex. At the same time, net debt has soared to $4.6 billion (£3.5 billion), nearly seven times its current market capitalisation of £530 million.
All eyes are on Cineworld’s results announcement later this week. Emma-Lou Montgomery from Fidelity comments that “In the face of rising living costs, any reluctance to spend on the part of cinema-goers will hit Cineworld hard … This is a company on a knife-edge and time will tell whether Cineworld gets its happy ending or not.”
Boohoo was an early winner from the popularity of online shopping during the first lockdown, fuelling the doubling of its share price. However, the company has since had a similarly rapid fall from grace, with a near 80% drop in its share price since mid-2020.
What’s behind its share price fall? Simon Mugo from Asktraders.com points to “the sweatshop labour scandal uncovered in 2020 and the resulting investigation, which indicated that the company was aware of the practices by some suppliers but turned a blind eye.”
This led to an exit by institutional investors. Further headwinds include the impact of rising inflation and interest rates, together with supply chain issues.
However, despite this negative trading sentiment, Boohoo recently announced positive results, leading to a near 40% rise in its share price over the last couple of weeks.
Hammerson owns real estate such as the Bullring and Brent Cross shopping centres. Unfortunately for Hammerson, the pandemic further accelerated the move from physical to online shopping. And the resulting three years of losses have led to a fall of nearly 90% in Hammerson’s share price since its 2018 peak.
That said, there is a glimmer of hope as strategic asset sales have enabled Hammerson to cut its net debt. The company’s recent results also showed a reduction in losses.
According to the FT, current 12-month price targets range from a low of 24p to a high of 45p. Therefore, the median price target of 33p suggests little upside from Hammerson’s current trading share price of 32p.
Kingfisher’s DIY retailers, Screwfix and B&Q, capitalised on the boom in DIY and the property market during the pandemic. It was suitably rewarded with a 150% increase in its share price from early 2020 to mid-2021.
But a 20% fall in its share price has led to a wobbly 2022, due to fears over the cost-of-living crisis reducing expenditure on non-essential items. Added to that, rising interest rates may create a cooling-down of the property market and related home improvements.
Professional investors are betting on the share prices of these companies falling in the near future. Investors might like to consider this potential downside risk if any of these companies are on their list of trading targets.
If you’re looking to get into trading and need a broker, our experts have compiled a guide to our top-rated share dealing accounts to inform your decision.
The post Share trading? Take a look at the most-shorted UK shares before you buy or sell appeared first on The Motley Fool UK.
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