Why Are J Sainsbury plc, WH Smith Plc and Wm. Morrison Supermarkets plc The FTSE’s Most Shorted Stocks?

J Sainsbury plc (LON:SBRY), WH Smith Plc (LON:SMWH) and Wm. Morrison Supermarkets plc (LON:MRW) are being heavily shorted: should Foolish investors pay attention?

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According to official data from the Financial Conduct Authority (FCA), J Sainsbury (LSE: SBRY), WH Smith (LSE: SMWH) and Wm. Morrison Supermarkets (LSE: MRW)are the three most heavily shorted stocks on the London Stock Exchange.

That means that investors — mainly hedge funds — have borrowed and sold these companies’ shares in the hope that they will be able to buy them back more cheaply at a later date, generating a profit.

The numbers are quite surprising: 12% of Sainsbury’s shares have been shorted, along with 10% of WH Smith’s and 8% of Morrisons’. There’s clearly a large amount of ‘smart’ City money behind these shorts, but does the bear case make sense?

Sainsbury

On 20 November, I wrote that Sainsbury was making me nervous. Since then, the supermarket’s share price has fallen by nearly 10%, suggesting I was right to be cautious.

In my view, the confident outlook of Sainsbury’s management is a concern: it was the last supermarket to acknowledge the scale of the changes facing the UK supermarket sector, it already has lower profit margins than its peers, and it recently admitted that 25% of its stores are too large.

I think there could be more bad news to come from Sainsbury, but after falling 40% in 12 months, I’m tempted to say that the shares are now close to the bottom.

WH Smith

In contrast to Sainsbury, WH Smith’s share price is currently at an all-time high, putting the company’s shares on a bullish forecast P/E of 15 times 2014/15 forecast earnings.

I can see the case for a short here: the firm’s share price already reflects a fair amount of future growth and its latest trading statement suggested that it is totally dependent on its travel outlets for growth, as like-for-like sales at high street stores fell by 4% during the last quarter.

Morrisons

Although Morrisons’ latest trading statement suggests that its turnaround plan is going well, the firm hasn’t yet manage to reverse declining sales volumes and regain any of its lost market share.

Until this happens, the jury is still out — and although I’m personally quite optimistic about Morrisons, it’s worth pointing out that the sustainability of its dividend is still doubtful, and on a P/E of 13.5 times next year’s earnings, its valuation is already quite full.

For me, Morrisons is a hold.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Wm. Morrison Supermarkets. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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