Yesterday was a rough day for Marks & Spencer (LSE: MKS) shares as the share price fell over 12% after the company announced a £600m rights issue and a 40% cut to its dividend. Naturally, many investors were unimpressed with this dividend news (MKS has always been a popular income stock) and dumped the shares. You can read more about yesterday’s announcement in this article by my colleague Paul Summers.
Today, I want to look at the announcement and subsequent share price fall from a slightly different angle and explain how investors could have easily avoided this double whammy of a dividend cut and share price crash. By paying attention to this one thing, investors could have potentially spared themselves considerable pain.
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Always watch the shorters
One thing I often stress is that it’s important to keep an eye on the list of the most-shorted stocks. You can find this at shorttracker.co.uk. These are stocks that hedge funds and other sophisticated investors are predicting will fall in price.
Only a few months ago, in November, I warned readers that Marks & Spencer was actually the third most-shorted stock on the London Stock Exchange and that the number of shares being shorted was increasing. As a result, I said that MKS was a retail stock I wouldn’t touch even with free money. That call looks good right now as the stock is down nearly 15% since then and income investors have also seen their income slashed.
The shorters often get it right
The thing to understand about shorting is that when the professionals short a stock, they usually have a pretty good reason for doing so.
Whereas the market is full of ‘weak’ long investors (for example, funds that simply own a stock because it’s in an index), you rarely find weak shorts. Usually, the shorters are absolutely convinced that something is wrong with the company when they short a stock.
And whether the problem is related to revenue, profits or cash flow, the shorters often get it right. Just look at Carillion, Kier Group, and Metro Bank – three stocks that were shorted very heavily in recent years and have seen their share prices take a beating. In Carillion’s case, investors lost everything.
So, if a stock is highly shorted, it’s worth being careful. Often, the best approach, in my opinion, is to simply steer clear.
Be careful of these stocks
Looking at the list of most-shorted stocks, other names that are high up on the list at present include Ultra Electronics, Arrow Global, Debenhams and Pearson. All four of the stocks have at least 10% of their shares being shorted, which tells us that professional investors see issues they don’t like and are betting significant amounts of money that the share prices of these companies will fall. With that in mind, I think it’s worth approaching these stocks with caution right now.