As we approach the end of the year, many investors will be conducting their yearly portfolio review and mapping out their investment game plan for next year.
While there are plenty of attractive opportunities in the market at present, there are also plenty of companies that investors should stay away from. Here are the five companies I’m avoiding during 2015, presented in order of short interest.
High valuation
Right at the top of the list, with 9.8% of its shares out on loan is WH Smith (LSE: SMWH). Since the end of October, WH Smith’s shares have jumped by nearly 40%, taking the company’s forward P/E to 15.2. And it seems as if this high valuation is attracting short sellers.
In the past, WH Smith has traded at an average P/E in the high single-digits, so this high valuation, seems unwarranted. The group’s earnings are set to expand only 7% next year and WH Smith supports a dividend yield of 2.7% at present.
Struggling to rebuild
Troubled outsourcer Serco (LSE: SRP) is trying to rebuild itself after numerous scandals have rocked the company over the past few years. Unfortunately, things only seem to be getting worse for the company.
Indeed, after it announced a writedown of assets and rights issue to shore up its balance sheet, the company’s shares crashed, reducing the amount of cash the could be raised from a rights issue. Many analysts have now concluded that the rights issue will not be enough to stabilise the company.
At present, 8.4% of Serco’s shares are out on loan to short sellers and looks as if the company is going to struggle going forward.
Missed forecasts
6.9% of Ocado’s (LSE: OCDO) shares are out on loan to short sellers. As of yet, the group has failed to report a profit despite its high valuation.
It seems as if traders are betting that the company’s share price will fall further, before the group can report a trading profit. That being said, City analysts expect the company to report earnings per share of 4p next year. However, Ocado has a history of missing forecast after forecast, and it would appear as if traders are betting that the company will fail to targets once again next year.
Emerging market turmoil
Just under 7% of Ashmore’s (LSE: ASHM) shares are on loan to short sellers. Ashmore is a value-oriented emerging markets asset manager and is currently struggling to grow. For example, since 2010 the group’s earnings have fallen by nearly 20%, although revenue has remained constant.
City analysts are expecting the company to report earnings per share of 21.6p next year, which puts the group on a forward P/E of 13. But while Ashmore’s shares do appear to be fully valued, the group does offer shareholders a 6.1% dividend yield, which could be too hard to pass up.
Still, turmoil within emerging markets has scared investors away from Ashmore and this seems to be the reason behind the high number of short sellers chasing the company.
Slowing growth
ASOS (LSE: ASC) has consistently missed expectations this year and with 5% of the company’s shares still on loan to short sellers, it seems as if the market is betting that the company will continue to disappoint.
ASOS recently revealed that the group’s sales were slowing. Within its third quarter update the company noted that international sales for the three months to November 30 fell 2% to £141m, driven by a 6% decline in sales outside the EU and the US.
Nevertheless, here in the UK ASOS performed exceptionally well during the quarter, helped by the Black Friday sale. UK sales rose 24% during the period, while overall group retail sales rose 8% to £246m.
Nevertheless, ASOS’ earnings per share are expected to contract by 5% next year and based on this sluggish growth, the company’s current forward P/E of 64 seems excessive.
