The GameStop saga has thrown up the issue of short-selling stocks and it might just be many new investors’ experience of it. Even if it does sound familiar, it’s the first example of a heavily-publicised short-squeeze for a long time.
And although the drama has been US-centric, inevitably UK investors will turn to their own backyard to see if a similar thing is likely to happen on this side of the pond.
Given the media theatrics and the #silverqueeze spread, it seems like a good time to get to grips with what shorting is, who the most shorted companies on the FTSE are, what that means for them, and why.
Most investors buy stocks in the hope that they’ll go up in price. If they do, they can sell them and bank the profits. Short selling works differently.
An investor borrows shares in a company and then immediately sells them. They hope the price goes down, so they can buy those shares back at a lower price.
Their profit is the difference between the price they initially sold the shares for and the price that they bought them back at.
So let’s say there was a company with shares trading at £100 a piece. You could…
If you buy shares and believe they’ll go up, that’s probably because you think the company that you’ve bought into is going to do well. Short selling works in reverse.
You may think that a company is going to do badly or that its shares are overvalued.
Either way, you think that its shares are going to fall in value and so you use a short selling position to take advantage of that.
Short selling is risky business, there’s no two ways about it. If you’re long a stock (holding a share you hope goes up) your gains can keep rising if that graph keeps going to the top right of the page. But, importantly, if the company collapses the most you can lose is 100%. It would be nasty, but it’s finite.
With shorting, if you believe the company will ultimately fail, the most you can theoretically make is contained in that 100% fall. Now, there are complexities about actually getting out of your position just before it all falls apart, but that’s the overall aim. And because you make gains on the way down, if that stock rises you’re in the red. And as we’ve said, that rise can keep going right up the page. Some big name investors have lost huge sums because their shorts have worked against them.
Pershing Square manager Bill Ackman famously took a $1bn short position against Herbalife that went sour. And more recently, ex-Jupiter fund manager James Clunie left the firm after a lengthy short against Tesla went against him.
And then there’s the recent case study of GameStop specifically. It’s an extreme example because some reports suggest approximately 140% of the company’s shares had been sold short at one stage.
The scale of buyers pushing the price up, and short sellers having to buy back stock to close their positions was therefore amplified by the sheer scale involved. So it’s worth remembering that all ‘short stories’ don’t include the same magnitude, as you’ll see from the UK’s top ten most shorted companies.
It’s also important to say that simply looking at which companies carry short interest does not mean there is the possibility of a squeeze reversing the share’s performance. And it goes without saying that nothing here is to be taken as advice to buy or sell any share mentioned.
But, good investment research does involve seeing what the quality of the shareholder register is like and why investors might be predicting a fall in price.
Here are the most shorted stocks in the UK and some reasons behind those decisions.
This list reflects data collected on 1 February 2021. For the most recent data, visit the FCA short tracker.
Oil prices have struggled to climb far above $50 per barrel since their lows in May last year. And while a lot of producers have been hit, Premier Oil really reached the doldrums late in 2020.
High debts and very real worries over the firm going out of business means Premier is currently the most shorted stock on the FTSE. But there might just be a way back to the good books for the firm. Fellow producer Chrysaor has swooped in, hoping to merge with Premier to form Harbour Energy.
The deal gives Premier a lifeline and the cash it desperately needs to address its debt but a backdrop of lower oil prices and a steady shift towards global renewable energy will be harder to manage.
FTSE 250 oilfield company Petrofac has attracted short-sellers eyeing its demise since its share price peaks in 2012.
Cancelling its dividend and posting losses of nearly £60m halfway through last year didn’t help steady the ship either.
A progressive stance from the board, which outlined a commitment to reach net zero emissions by 2030 and have 30% of its senior roles filled by women, brought some positivity back. But that sentiment was decimated this month as the firm announced a former senior exec pled guilty to a number of bribery offences.
The sales employee pled ‘guilty to his role in offering and making corrupt payments to agents to influence the award of contracts' according to the Serious Fraud Office. Shares dropped 20% on the news.
A superficial reading of the supermarket sector would give the impression that the likes of Sainsbury’s actually did quite well in 2020. But feeding a locked down nation brings its own challenges, as the group has seen.
With higher demand comes a hike in costs associated with delivery and staffing. These expenses have put a dent in any real growth the firm has seen.
And then there are the problems facing the chain even before the virus struck. Aldi and Lidl are still trying to steal market share and a race to offer customers the best value for money has meant strict cost-cutting all over the group.
With consumers more price-conscious than ever and a raft of cheaper options out there, it’s hard to see how the big chains can get back to the margins they were used to.
Government outsourcer Carillion still sits on the FCA’s short tracker but its high profile collapse has been well-documented. But, even with it gone, the story is a good reminder of the role short selling can play in adding fuel to the fire of a company’s fall from grace.
Some short sellers see themselves as canaries in the coal mine, performing a type of social good for the market in calling out the basket cases where others have failed to see them.
But there is another side to that. The practice tends to split opinion because of the way announcing big short positions can end up encouraging others to do the same and ultimately completely destroy a firm’s prospects.
Supporters of shorting tend to defend themselves, saying that you can’t short a good company because its fundamentals will eventually prove you wrong.
But again, where companies are going through difficulties, many investors see the opportunity to help restructure rather than attack.
In the end, Carillion’s detractors won out. And while thousands of jobs were lost, short sellers will justify their actions by pointing to the overall effect they have on the corporate ecosystem.
It may be that they keep firms on their toes and hold them accountable to shareholders. Equally, it may be that there is an unpalatable bloodlust inherent in this style of investing.
The truth is probably somewhere in between.
Lockdown has been a real hammer blow for Hammerson. The shopping centre operator is directly exposed to the ups and downs of the UK economy and suffered during 2020 as a result.
And with tourist favourite Bicester shopping village sitting alongside Birmingham’s Bullring in the company’s portfolio, the firm is exposed to the current dearth in travel too.
It’s a frustrating situation for a company already grappling with reduced high street footfall, in favour of online shopping.
Repeated lockdowns have meant that those willing to take a trip round the shops can’t even do that now. Britain’s household savings ratio hit 29.1% in 2020 - the measure’s highest rate ever.
Hammerson will be hoping anything close to normal service can resume while they still have the ability to keep the lights on.
Yet another victim of a lower oil price is Tullow. But, like a lot of the other stories here, problems were afoot before the pandemic took hold.
For Tullow, the issues are quite simple. It’s borrowed lots of money to finance projects that haven’t paid off.
As a result, it’s now struggling to continue operating properly as creditors become anxious about its ability to pay them back.
The firm had to write down assets in Kenya and Uganda this year by $941m, not particularly long after having to write off $2.7bn worth of assets back in 2015.
A lot of firms will find themselves in similar positions after 2020. But Tullow has been hit so many times by these things over the past decade that it’s hard to see the group as having been unlucky.
The company’s adventurism has not paid off. Projects across Africa, South America and Europe have all led to massive losses.
The world’s second largest cinema chain topped the pile of shorted stocks at times last year, as lockdowns all but halted business.
Adding to public restrictions, film producers have been delaying the screening of new titles over the past year until eyes can finally get out to see them.
Worryingly for Cineworld, some have started to explore streaming premieres instead.
The company’s value has suffered as a consequence but bosses securing a £336m cash lifeline in November seemed to jolt a bit of life back into shares.
Now a controversial management incentive scheme seems to be dividing investors.
A third of shareholders recently voted against a plan that would see bosses split a £65m bonus pot if shares recover. But the resolution still got the 50% it needed to be passed.
To get a £33m slice, Cineworld’s share price will have to reach 190p within three years, back to pre-pandemic levels. For the whole £65m it must hit 380p.
Payment solutions firm Network International might not be overly familiar to many UK investors. The company, which only listed in 2019, is mainly active in Africa and the Middle East.
It might still be too early to get too bullish or bearish on the stock but a distinct lack of confidence so far brings it onto this list.
A new strategy might be necessary to get the market back onside. This might be the reason for the appointment of Mastercard’s ex-strategy head for international markets as Network’s new CEO.
Nandan Mer started yesterday - the market will be waiting to see what plans he has in place to diffuse the shorters’ enthusiasm.
Russian gold miner Petropavlovsk might seem like an outlier here due to its recent bull run. But that’s likely a reason for the short-sellers to get involved if they see a change in tide coming.
The firm runs some of the largest mines in Russia and grew revenues strongly coming into 2020. With gold gaining renewed attention as a safe haven asset in times of strife last year, Petropavlovsk shares stood to benefit.
One thing that might be on investors’ minds is the outlook for gold from here and how that could feed into the miners’ share prices, especially the ones that have done well.
Gold can be useful at times of inflation, which many market-watchers are preparing for in light of 2020’s government spending. If that fails to materialise, gold prices could fall, taking the likes of Petropavlovsk with them.
When everyone else was scaling back their high street branches, Metro Bank was knocking through the ceilings and creating banking cathedrals.
The firm entered the UK as a challenger to an industry that wasn’t that used to change. But the mood music suggested something wasn’t right.
In January 2019, the firm’s shares lost over a third of their value in one day as it revealed it didn’t have enough cash on hand to meet its commercial loans.
Throw in some more reporting mistakes, a reputational hit and the pandemic, and it’s been hard for Metro Bank to start afresh.
Natwest recently agreed to take a £3bn mortgage book off its hands, lifting the Metro share price. It will need a steady stream of equally positive news to lift investors’ spirits.