Greggs (LSE: GRG) shares have taken a huge hit recently. Year to date, they’re down about 40%.
Now, I was starting to think that there was some value on offer after this big fall. But then I spotted some worrying data that changed my mind.
Hedge funds are aggressively betting against Greggs
The data I’m referring to is the ‘short interest’ in Greggs shares. This is the percentage of the company’s shares that hedge funds and other institutional investors are selling short (betting will fall).
According to the Financial Conduct Authority (FCA), Greggs has short interest of 9% right now with 11 different funds betting against the stock. That’s the highest level of short interest in the UK market meaning that Greggs is the stock that hedge funds are most bearish on.
When I last covered Greggs, in September, there were only seven funds betting against the company. So, sophisticated investors have become more bearish here in recent months.
Note that short interest could actually be higher than 9%. Because firms with short positions of less than 0.5% of the company’s shares don’t actually have to declare their positions to the FCA.
Beware the short sellers
Now, short sellers don’t always get things right. But quite often they do (they tend to do a lot of research).
Some UK stocks that have been heavily shorted in recent years and gone on to tank include ASOS, Boohoo, Cineworld, and Carillion.
Personally, I was burnt by both ASOS and Boohoo. I made the mistake of ignoring the short interest data on these stocks and it cost me a lot of money.
So, these days, I tend to steer clear of any stock with a high level of short interest. In my experience, owning a stock that is being heavily shorted is extremely risky.
What do the shorters see here?
As for why institutions are betting against Greggs shares, I imagine that it’s because they expect the company’s growth and profitability to be disappointing in the near term. Recently, Greggs has produced a number of weak updates in which performance has been underwhelming.
There are a few issues at play here. These include weaker levels of consumer spending, rising costs (labour, raw materials, energy), theft, the weather, and perhaps even market saturation (have we seen ‘peak’ Greggs?)
I’ll point out that short sellers often bet against stocks that are massively overvalued. That doesn’t seem to be the case here though – the price-to-earnings (P/E) ratio is only about 13.
Greggs shares could still rise
Now, as I said earlier, short sellers aren’t always successful with their trades. One thing that could hurt these traders here is a better-than-expected trading update from Greggs,which could well happen.
This could see a lot of buyers come in. And it could lead to a ‘short squeeze’ (where short sellers have to buy the shares too in order to close their positions), pushing the share price up sharply.
However, I see the high level of short interest as a major red flag. So, for now, I believe investors should consider avoiding the stock.
