The 5 most heavily shorted UK stocks

I used short position data provided by the Financial Conduct Authority to discover the most shorted UK stocks. Find out which five UK stocks made the list here.

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The five most heavily shorted UK stocks are J Sainbury, Cineworld, HammersonPetropavlovsk, and WM Morrison Supermarkets. Short-sellers borrow shares and then sell them. If share prices fall, they can repurchase them at a lower price and pocket the difference. If share prices rise, short sellers will be buying them back at higher prices, and they will lose money. So, a lot of short interest in stock might be considered a bearish signal.

Top five shorted UK shares

I used today’s short position update from the Financial Conduct Authority (FCA) to find the five most heavily shorted UK stocks. Firms with a net short position of 0.1% or greater of the issued share capital of a listed company have to report their position to the FCA. I have summed up the positions of various firms that are short the same stock to get a total.

Sainbury has 7.51% of its shares sold short and is the number one shorted UK share at present. Next is Cineworld at 7.29%, then Hammerson with 6.47%. Petropavlovsk comes in next at 5.72%, and finally, Morrison is in fifth place with 5.6%. 

Why are these stocks being shorted?

Short selling a stock is not necessarily an indication that that seller thinks the price will crash. Strategies like equity market neutral and pairs trading involve buying and shorting stocks. They do not necessarily depend on shorted stock prices crashing. However, the top five are heavily shorted, and I think that indicates the short sellers are taking a bearish position.

Hammerson is a commercial landlord. It has suffered from lower rent collections during the pandemic. Its shares have risen sharply since October 2020, perhaps in anticipation of a return to normality. But, perhaps the short sellers are forecasting unpaid rent problems persisting long into 2021 and beyond and maybe forcing a breach in the company’s debt covenants.

Short sellers might think Cineworld has lost customers to streaming and online movie releases. The lack of blockbuster releases and social distancing protocols might make a cinema trip unappealing throughout 2021, which could make dealing with the company’s large debt pile a problem.

As for Sainsbury and Morrison, I would suggest the shorters think the boost in sales and share price seen during the pandemic is coming to an end. Also, a shift to ordering online during the pandemic, if it persists, will be damaging as it stands because it’s the least profitable channel.

And finally, we have Petropavlovsk. In the last year, there has been a boardroom coup, a police investigation of an executive, and a downgrade of reserves. Short sellers will likely be focusing on that.

Reddit stocks

Could short selling be a buy signal? Well, over in the US, we have seen GameStop and AMC rally after a coordinated buying effort organised through Reddit (and other platforms) — this was in response to heavy short selling against those stocks.

UK stocks do not seem to gain the traction online that their US counterparts do, so I do not think it is likely that these five could become ‘Reddit stocks’. It is not impossible, though — Cineworld and AMC do have a lot in common, after all. But even if the combination of heavy short selling and heightened online chatter around a stock could be interpreted as a buy signal, it would appear to be a short-term one.

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.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons. 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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