Do you own the next Carillion plc?

After getting it right with Carillion plc (LON: CLLN), short sellers have turned their attention to these troubled firms.

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It’s not a record any company wants, but for many quarters Carillion (LSE: CLLN) held the title as the most shorted stock on the LSE. And with those who bet on the firm’s collapse into administration proving prescient, retail investors may find it worthwhile to see which other big names are being heavily shorted by institutional investors. 

Going the way of the Dodo?

And the biggest target currently is Debenhams (LSE: DEB), which as of February 22 had a full 13.8% of its shares borrowed by short sellers. It’s no wonder that investors have turned negative on the department store chain considering its very poor Christmas period trading update covering the 17 weeks to December 30.

Over the period UK like-for-like sales fell 2.6% and gross margins dropped 150 basis points as management noted the retail market continued to be “volatile and highly competitive with weaker demand. But what should really worry investors is management’s revised forward guidance for fiscal year 2018 with pre-tax profits of £55m-£65m. This compares with £95.2m in 2017 and £114.1m in 2016.

As sales and margins slip, Debenhams’ £275.9m in net debt and £80.9m in pension obligations may begin to be a problem in the medium term. With few signs of a turnaround on the horizon, there’s little chance I’ll be taking a long position in the struggling retailer any time soon.

Yet another turnaround plan 

It’s a similar story for venerable Marks & Spencer (LSE: MKS), which has 10.18% of its shares borrowed in anticipation of further pressure on its share price. Once again, the culprit is a failure to keep up with changing consumer habits as e-commerce erodes footfall on high streets and damages all stores except those at either the bargain or high-end part of the spectrum.

The company’s Q3 trading update for the 13 weeks to December 30 showed UK like-for-like sales fall 1.4% as clothing sales dropped 2.8% and food sales were 0.4% down against the year prior. The reversal in trading for the once mighty grocery arm is a particular worry for investors as management is busy opening new food-first stores.

With £2bn in debt, cracks appearing even in its grocery store division and consumers still turning away from its clothing offerings in droves, I’ll be steering well clear of Marks & Spencer for the foreseeable future.

One for the dogs?

And it’s not only clothing retailers that are being targeted as a full 11.47% of Pets at Home’s (LSE: PETS) shares are borrowed by short sellers. This is because specialist retailers such as this one are under particular threat from e-commerce as consumers can generally find pet food, merchandise and even medicine online at significantly lower prices.

The worry is that to compete, the company will need to ramp up discounting and sacrifice some profits. This does appear to be happening as investments in building up its online offering alongside discounting led EBITDA margins to drop from 14.7% to 13.2% year-on-year in the half year to October.   

Although the firm’s revenue is still growing as it opens new stores and increases veterinary care offerings, margin pressures and sector-wide problems are worrying. Add in former private equity owner KKR ditching its remaining stake in January and I’ll be avoiding Pets at Home.

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.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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