The Motley Fool

3 UK shares I’d avoid because hedge funds expect them to fall

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A stock price graph showing declines, possibly in FTSE 100
Image source: Getty Images.

One thing I always keep a close eye on as part of my investment research is the list of the most shorted UK shares. These are the shares that hedge funds and institutional investors are betting heavily against.

When stocks are heavily shorted, it pays to be careful. The hedge funds don’t always get things right yet, quite often, they do. Carillion, Thomas Cook, Debenhams… these were all heavily shorted stocks and look what happened to them.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Here, I’m going to highlight three UK shares being shorted heavily right now. Given the high level of ‘short interest’ on these stocks, I’d steer clear.

These UK shares look risky

One of the most shorted stocks on the London Stock Exchange right now is cinema operator Cineworld (LSE: CINE). According to shorttracker.co.uk, 9.7% of its shares are being shorted. That’s a worrying level of interest.

It’s not hard to see why the hedge funds are targeting Cineworld. For starters, 2021 is likely to be extremely challenging for cinema operators due to Covid-19 restrictions. Even after vaccines are rolled out, admission numbers are likely to remain depressed.

Secondly, Cineworld has a huge debt pile. In a recent trading update, the company advised it now has aggregate gross debt financing of $4.9bn. This makes the company vulnerable financially.

Overall, Cineworld is a short seller’s dream. The company faces huge challenges due to Covid-19 and has a very weak balance sheet. Given the high level of short interest, I’d avoid the stock.

Criminal investigation

Turning to the oil and gas sector, Petrofac (LSE: PFC) is another UK share I’d avoid. It’s currently the fifth most shorted stock in the UK, according to shorttracker.co.uk, with 7.9% short interest.

It’s quite obvious why this stock is being targeted. Currently, Petrofac is being investigated by the Serious Fraud Office in relation to bribery allegations associated with three historic contract awards in the UAE in 2013 and 2014.

Last week, Petrofac announced that a subsidiary employee has admitted additional charges under the UK Bribery Act 2010. This resulted in the company’s share price crashing more than 30%. Clearly, the hedge funds believe there’s more downside on the cards here. I’d steer clear.

Losing market share

Finally, Sainsbury’s (LSE: SBRY) is also a stock I’d avoid. It’s currently the third most shorted UK share and sports short interest of 9.3%.

Sainsbury’s doesn’t have obvious problems like Cineworld and Petrofac. However, digging deeper, there are some issues to be aware of.

The first is Sainsbury’s is rapidly losing market share to competitors such as Ocado, Lidl and Aldi. In January 2017, its market share was 16.5%. In December 2020, however, its market share was 15.7%.

The second is the supermarket giant has a large amount of debt on its balance sheet. At 19 September 2020, net debt was £6.2bn.

It’s also worth pointing out that Sainsbury’s shares have had a good run recently. Since the start of September, the stock has risen about 40%. Perhaps the short sellers see this share price rise as excessive.

Whatever the reason they’re short, I’m steering clear of this UK stock. When hedge funds are betting against a stock, caution is warranted.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Edward Sheldon has no positions in any 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.