Premier Oil and Cineworld: why I’m not buying these shares

Premier Oil and Cineworld are two of the most shorted stocks in the UK right now. For this reason, Edward Sheldon is steering clear.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One thing I always keep an eye on as part of my investment research is the list of stocks that have the highest levels of ‘short interest.’ This list contains stocks that hedge funds and institutions are betting heavily against. In other words, sophisticated investors expect these shares to fall.

Here, I’m going to discuss two stocks that are being heavily shorted at present – Premier Oil (LSE: PMO) and Cineworld (LSE: CINE). Given their high levels of negative interest, I’m steering well clear.

Premier Oil: the UK’s most shorted stock

The most shorted stock in the UK right now, according to, is Premier Oil. It’s an exploration and production company with oil and gas interests in the North Sea, South East Asia, the North Falkland Basin, and Mexico. Currently, it has short interest of 15.1%, which is very high.

It’s not hard to see why short sellers are targeting Premier Oil. This is a company that’s been struggling for years, due to high debt levels and rising production costs. The huge drop in the price of oil last year didn’t help. Additionally, the company has a relatively high valuation at present. Currently, its forward-looking price-to-earnings (P/E) ratio is 29.

The prospects for Premier Oil could improve, of course. Late last year, the company announced plans to merge with privately-owned North Sea operator Chrysaor. This deal could secure Premier’s future and create a stronger business. Premier expects the transaction to complete on 31 March with Premier’s shares to be readmitted to trading on 1 April as Harbour Energy plc.

However, I don’t think PMO shares are worth the risk. Given the high level of short interest, I’m not touching this stock.

Saddled with debt

Cineworld is another UK stock that’s getting plenty of negative attention right now. It’s currently the seventh most shorted stock in the UK with short interest of 5.6%.

The bear case is also quite clear here. Not only is the company likely to continue facing challenges in 2021 due to Covid-19 restrictions, but it’s also facing challenges from new forms of entertainment, such as streaming (Netflix and Amazon Prime) and video gaming. On top of this, the company has an enormous amount of debt on its balance sheet. In a recent update, it told investors net debt stood at nearly $5bn.

It’s worth pointing out that short interest here is a lot lower than it was in January when it was just under 10%. This means hedge funds are not as bearish as they were. This suggests the outlook has improved a little as vaccines have been rolled out.

One thing that could help Cineworld is its significant exposure to the US. In the near term, many US consumers are going to have considerable spending power as a result of the $1.9trn stimulus package that was recently passed.

I’m still avoiding this highly-shorted UK stock though. The risks are too high for my liking and I think there are better reopening stocks to buy.

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.

Edward Sheldon owns shares in Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Netflix and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

More on Investing Articles

Investing Articles

This 9.75% yielding FTSE 100 share is a total no-brainer for second income

This FTSE 100 insurance company is an absolutely brilliant source of second income and Harvey Jones reckons it will be…

Read more »

Dividend Shares

I could make £14.2k of passive income from £99 a week with this secret sauce

Jon Smith explains why sacrificing the immediate reward of dividends today can boost his long-term passive income prospects.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Which looks the better bank buy right now: Lloyds or NatWest shares?

Lloyds shares are a very popular pick among FTSE 100 investors, but I think there are several better choices overall,…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d target a £14,616 annual passive income with M&G shares!

Big passive income can be generated over time with 9.5%-yielding M&G shares, especially if the dividends paid are used to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

If I’d put £1k in this FTSE 100 stock five years ago, here’s how much I’d have now!

Mark David Hartley works out what sort of profit he’d have made by investing in this FTSE 100 pick pre-pandemic.…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »