Should you avoid the UK’s most hated stocks? Carillion plc, Ocado Group plc, WM Morrison Supermarkets plc, Mitie Group plc and J Sainsbury plc

Should you sell the market’s most shorted stocks Carillion plc (LON: CLLN), Ocado Group plc (LON: OCDO), WM Morrison Supermarkets plc (LON: MRW), Mitie Group plc (LON: MTO) and J Sainsbury plc (LON: SBRY).

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Tracking short interest is a great way of gauging market sentiment and finding those companies with a story the market doesn’t trust.

However, short interest can also be highly misleading. Indeed, just because a stock has a high percentage of shares out on loan to short sellers, doesn’t necessarily mean it’s going to go out of business.

The most hated stock in the UK

Carillion (LSE: CLLN) is the most hated stock trading in the UK according to data disclosed by the FCA’s daily short positions report.

Around 20% of Carillion’s shares are out on loan to short sellers, and so far this year the bet seems to have paid off as shares in Carillion are down by 9% year-to-date excluding dividends. Still, after recent declines. the company’s shares have fallen to a relatively undemanding forward P/E of 7.8 and support a dividend yield of 6.6%.

Looking expensive

Just over 18% of Ocado’s (LSE: OCDO) shares are out on loan to short sellers according to the FCA’s daily short positions report.

Over the past 12 months, Ocado’s shares have fallen by 29% as investors have turned their back on the company following yet another year of failed promises. And even after recent declines, Ocado’s lack of profitability means that the company’s shares remain extremely expensive. They currently trade at a forward P/E of 109 and earnings per share are expected to grow at a relatively subdued 26% during 2016.

Retailer struggles

There are 14% of Morrisons (LSE: MRW) shares out on loan to short sellers according to the daily FCA report making the company the third most shorted large-cap on the UK market. It seems these shorts are betting that Morrisons will continue to struggle against larger peer Tesco and low-price rivals in the race for customers in the UK’s increasingly aggressive retail market.

City analysts expect earnings per share to grow by 31% this year after falling for the past four years straight. Based on these forecasts, Morrisons shares trade at a relatively undemanding forward P/E of 18.9 and offer a dividend yield of 2.7%.

Slow and steady

There are 9.9% of Mitie’s (LSE: MTO) shares out on loan to short sellers. Year-to-date the company’s shares are down by 10%, and it looks as if the shorters are betting on further declines. However, City analysts are expecting Mitie to rack up slow and steady growth over the next two years, extending the company’s record of steady growth from 2011. At present Mitie trades at a forward P/E of 10.9 and supports a dividend yield of 4.6%.

Falling earnings

Finally, Sainsbury (LSE: SBRY) is the fifth most hated large-cap stock in the UK with 8.3% of its shares out on loan. Sainsbury’s is another victim of the movement against UK retailers. Also, it seems as if some traders are betting that the company’s recent merger with Home Retail won’t succeed.

And betting against Sainsbury’s over the past three years would have yielded some impressive results. Since the end of 2013, shares in the company have lost 34% of their value. There could be further declines to come. City analysts expect the company to report a 9% decline in earnings per share for the year ending 31 March 2017. Sainsbury’s is currently trading at a forward P/E of 12.9 and supports a dividend yield of 4.5%.

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.

Rupert Hargreaves has no position in any shares mentioned. 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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