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

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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.

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Premier Oil: the UK’s most shorted stock

The most shorted stock in the UK right now, according to shorttracker.co.uk, 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.

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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.

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