Short selling a stock means borrowing it, selling it for cash, and then buying it back to return to its original owner. Short sellers need the share price of a company to fall to make money, and so they must have seen something they don’t like in it.
Let’s try to step into the mind of a short seller, and imagine what they are seeing as they look at the following three companies, whose stocks have been the most heavily shorted in the FTSE.
Wood Group
The net short position against multinational energy services company Wood Group has grown to 10.62% since making October’s list with 9%. The company is still heavily exposed to the oil and gas industry where investment responds to expectations of future oil prices and is cyclical.
Factor in structural changes like the US shale boom, and the need to move towards a low-carbon future and a company that recently sold its nuclear energy business to focus on oil and gas may not be attractive over time. A swing to a first-half profit for the current year has not been enough it would seem, to convince the short sellers that this year will be different from the last two, where losses had been made.
Metro Bank
Vernon Hill, the founder of Metro Bank (LSE: MTRO), is stepping down from the board and his role as chairman by the end of the year. An interim appointment will be made if the search for a long-term replacement is not successful. Why is it happening? The bank paid millions to an architecture firm, owned by Mr Hill’s wife, which along with opaque performance targets for executive remuneration packages, irked shareholders last year.
In January the bank revealed that it had incorrectly classified the risk of some loans on its books and understated the amount of risk capital it needed to hold against them. Capital raises have ensued, the most recent of which was in October. Accounts seem easy to open for customers, but many complain they are later frozen or restricted. Are new account openings something top management monitors?
A new chairman may be coming, but the same management team is now trying to convince shareholders that its share price, which sits 95% below the March 2018 all-time highs, is going up. The transcript of the Q3 2019 results call suggests that the consensus that profitability will return by 2021 is too optimistic.
The net short position is 9.97%.
Cineworld Group
After swallowing up its bigger US rival Regal Entertainment, Cineworld (LSE: CINE) became the second-largest cinema chain in the world. Investors were not thrilled by the blockbuster debt needed to finance the deal, nor by the strategy of entering a mature market in force when smaller, growing markets could have been entered on the cheap. The share price flopped in February 2018.
Chances of recovery now look slim. Sales have fallen, and that debt burden makes this all the more worrying. Cineworld’s sales are a slave to the timing of major film releases and streaming services will likely continue to have a negative effect on cinema sales. The recent introduction of a monthly subscription package for unlimited cinema visits may help boost sales, but a 9.81% net short position indicates some people think it’s too little too late.
