Is it time for me to buy the FTSE’s most shorted share?

Nearly 10% of the shares of this member of the FTSE 250 have been borrowed making it the UK’s most shorted stock. Could this be a mistake?

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According to the Financial Conduct Authority, 9.26% of the stock of Diversified Energy Company (LSE:DEC), the FTSE 250 gas producer, has been shorted. Ten investors have borrowed nearly £40m of the shares in the hope that they’ll go down in value.

The movement in the share price over the past five years might explain this pessimism. Compared to September 2019, it’s fallen 63%. And it’s down 25% since the start of 2024.

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Personally, I like DEC’s business model.

Should you invest £1,000 in Diversified Energy Company right now?

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It buys existing gas fields in the US and seeks to improve their operational performance and useful economic lives. It’s argued that exploiting existing sites rather than drilling for new ones is better for the environment.

Drilling into the detail

However, it’s a very complicated business to understand.

It regularly buys and sells fields, enters into long-term hedging arrangements, has a complicated debt structure and carries a provision in its balance sheet for the cost of retiring wells. This can make its financial performance difficult to analyse.

For example, one of its preferred measures is net debt-to-pro-forma trailing 12 months adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). Get your head around that!

But cash doesn’t lie.

In 2023, the company generated $410m from its operations. And during the six months ended 30 June 2024, it made $161m.

However, the company’s appetite for buying more wells and its need to repay its significant debt pile means a lot of this is given to third parties.

Politically unpopular

Concerns have been expressed that DEC is underestimating the cost of closing its wells.

In December 2023, four members of the US House of Representatives Committee on Energy and Commerce published a letter claiming that agreements with certain states allow the company to defer up to $2bn of environmental liabilities. Although lawful, the authors claim this enables DEC to give “the appearance of profitability on paper“.

The company refutes the assertion. In its defence it says that the allegations originate from an old story that was previously proven to be inaccurate. It also points to the awards that it’s won for its reporting transparency. And to the fact that the group’s auditors have never raised the topic. 

Encouraging valuation metrics

Despite these issues — which could explain why the stock’s so popular with short sellers — I think it remains one of the best income shares around.

It currently pays a ‘fixed’ dividend of $1.16 (88.2p) a year, which at a current (4 October) share price of 898p, implies an impressive yield of 10.2%. But as a reminder that dividends are never guaranteed, its payout was cut by two-thirds in 2023.

Interestingly, the company’s market cap of £440m is now not far off its book value as of 30 June 2024 of $548m (£416m). On the face of it, the shares appear to offer good value.

For these reasons, I remain a fan of the company — it’s been on my watchlist for a while.

But I don’t want to invest.

That’s because of the apparent long-term decline in its share price. Irrespective of what I think, if others have concerns about the company, its stock will continue to fall. And in these circumstances — even with such a generous dividend on offer — I don’t want to part with my hard-earned cash.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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 Beard has no position in any of the 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.

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