Shares in Neil Woodford-backed construction firm Kier Group (LSE: KIE) were hammered on Friday, losing 33% of their value. The dramatic share price fall came after the group announced on Friday afternoon that it plans to raise £264m by way of a rights issue. To do this, it will create 64.5m new shares, and sell these to investors at a price of 409p each – approximately 46% below Thursday’s closing price.
Construction sector risks
The reason Kier has launched the emergency rescue rights issue is that it wants to pay down its debt pile and strengthen its balance sheet after lenders have become a little more cautious towards the construction sector due to Carillion’s recent collapse. Kier CEO Haydn Mursell explained: “There has been a recent change in sentiment from the credit markets towards the UK construction sector, with various lenders indicating that they will be reducing their exposure to the sector. This has led to lower confidence among other stakeholders and an increased focus on balance sheet strength. The Rights Issue is intended to address these issues.”
Shareholder pain
I feel for Kier shareholders after Friday’s share price fall. Year to date, the stock is now down 53%. It’s never nice to see your wealth evaporate like that. That said, I’m not surprised at all by the 33% fall in Kier’s share price on Friday. In fact, in mid-September, I warned investors that something like this could happen with Kier Group.
Short interest warning
You see, back in September, I noticed that a number of hedge funds had been increasing their short positions in the firm (betting that the stock would fall). In the space of a month, short interest had surged from around 10% to 18%, making the stock one of the most shorted on the London Stock Exchange. That’s an extremely bearish signal. As a result, I warned that “I do think it’s worth being cautious towards the stock at this stage,” and advised that I would be steering clear. Hopefully, my article saved a few investors from getting burnt.
Be careful of shorted stocks
The key takeaway from this disaster is that it really does pay to keep an eye on the list of most-shorted stocks. You can find this at shorttracker.co.uk. When a stock has a large amount of short interest, there’s often some kind of problem with the company lurking beneath the surface. Hedge funds will have spotted something they don’t like and shorted the stock to profit from a falling share price. Quite often, the hedge funds get it right, so it pays to be cautious towards highly-shorted stocks.
Watch out for these four too
Looking at shorttracker’s list, other UK stocks that have very high levels of short interest at present include Ultra Electronics, Arrow Global, Marks & Spencer and Pets at Home. All four of these companies have at least 10% of their shares being shorted, which is a high amount. As such, it could pay to give them a wide berth, in my view.
