An oil exploration firm, a giant gambling company and one of the high street’s most familiar names are among the stocks that are currently being targeted by short sellers.
The Financial Conduct Authority (FCA) has ruled out banning short-selling during the ongoing market volatility, arguing that there was no evidence it causing stocks to fall.
Countries such as Italy and Spain have restricted short-selling – whereby investors profit from stocks falling rather than rising – in an attempt to curb volatility amid the ongoing coronavirus crisis.
However, a recent statement, the UK financial regulator said: “Aggregate net short selling activity reported to FCA is low as a percentage of total market activity and has decreased in recent days.
“It will continue to fluctuate, but there is no evidence that short selling has been the driver of recent market falls.”
There are currently 266 companies with short positions taking against them, according to the FCA’s register of such trades. Some 147 investors are running these positions.
But not every investor agrees with the FCA that short-selling should allowed to continue in the current market climate.
David Coombs, manager of Rathbones’ multi-asset funds, said: “Should short selling be banned? Normally my response would be ‘no’ as I believe it is a healthy dynamic in markets, challenging management teams’ thinking and providing liquidity. In fact, that was my response a week ago.
“But I have now changed my mind. Why? I think the current market situation, which is being influenced by extraordinary government intervention, means that we are in a distorted period of capital allocation.
“Opportunistic investors conspiring (albeit innocently and legitimately) together, driving companies’ market caps down and triggering covenant breaches, seems to me both morally and financially unacceptable. This has a real impact on people’s jobs and health at a time when society should be working together.”
With short-selling in the headlines, Trustnet takes a quick look at the some of the most shorted companies in the UK market today.
Source: FCA, as at 23 Mar 2020
The FCA’s data shows that oil & gas exploration & production company Premier Oil is the most shorted stock on the market at the moment, with some 21.55 per cent of its shares on loan to short sellers.
Five companies have shorts on the stock, including Asia Research & Capital Management, Connor, Clark & Lunn Investment Management, The Mangrove Partners Master Fund, Whitebox Advisors and WorldQuant.
Like all oil companies, Premier Oil has suffered as the oil price has tanked. Since the start of the year, the stock is down 82.13 per cent while oil has fallen 50.27 per cent.
The company has been one of the worst hit in the sell-off as it has a debt pile of close to £2bn and embarked on a series of acquisition deals worth over $800m at the start of the year – including buying the Andrew Area and Shearwater assets from BP for $625m.
Russ Mould, investment director at AJ Bell, highlighted this when discussing the heavy fall in the FTSE 100 on 9 March 2020 after the oil price slumped when Saudi Arabia said it would ramp up production.
“Logically the most pronounced falls are seen at heavily-indebted sector constituents where there will be increasing speculation about their ability to service their borrowings and over potential breaches of debt covenants,” he explained. “This explains the 50 per cent to 75 per cent falls for Tullow Oil and Premier Oil at the market open.”
Performance of Premier Oil and oil price in 2020
Source: FE Analytics
Other companies in the energy industry or related fields with short positions running against them include John Wood Group, Tullow Oil and Petrofac.
British sports betting giant Flutter Entertainment (formerly Paddy Power Betfair) is the next most shorted company on the FTSE, with 13.54 per cent of its shares out on loan at the moment.
There are 14 short-sellers circling the stock, with UBS O'Connor, Westchester Capital Management, AQR Capital Management, Alpine Associates Management, BlackRock Advisors, Sand Grove Capital Management and Carlson Capital UK holding positions of more than 1 per cent.
It’s down 23.07 per cent over 2020 so far, but that is better than the FTSE 100’s 26.96 per cent decline over the same period.
Potential reasons for shorting Flutter Entertainment include coronavirus causing sporting events to be cancelled, signs that it could be overvalued (such as a relatively low return on equity and static dividend growth), merger arbitrage on its deal to take over The Stars Group – which would make it largest gambling company in the world by revenues – and concerns that gambling firms could face further regulatory burdens in 2020.
High street chain Debenhams is third on the most-shorted list with 9.53 per cent of its shares on loan. Two companies are shorting the firm: Odey Asset Management and UBS Asset Management.
Debenhams has been a target for short sellers for some time after posting a series of profit warnings and entering into a ‘pre-pack’ administration last year. The firm is in the middle of a major financial restructuring process and permanently closed 22 stores, with another 28 expected to close next year.
However, it is also suffering under the ongoing coronavirus crisis and this week announced that it will be temporarily closing its remaining 140 stores while the outbreak continues.
Short sellers of the company will be expecting serious disruption to the company’s revenues while its stores are closed. Other shorted retail names that could suffer from reduced footfall and store closures include Pets At Home, Marks & Spencer and Intu Properties.