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Should you avoid some of London’s most shorted stocks, Ladbrokes plc, Ocado Group plc and Just Eat plc?

These growth stocks below have large short interests from institutions and hedge funds. All three are among the most shorted stocks in London. 

Company Short Interest
Ocado 19.66%
Ladbrokes 8.52%
Just Eat 7.02%

Increasing competition for Ocado

Ocado (LSE: OCDO) has been under pressure for some time now. Increased competition from companies such as Amazon and Uber has made investors doubt whether Ocado can be a success. The thin margins Ocado operates on give the company little room for manoeuvre and competing against companies with seemingly endless amounts of capital will be tough. Worryingly, the company has been borrowing more and using lots of cash to develop the business. 

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I’m still doubtful of the business model and the £1.5bn market cap looks insane to me. There has been much talk of a takeover attempt coming from a big rival but I can’t see Amazon coming along and spending billions on a small operation. It seems as if many financial professionals are betting on Ocado to fall and shares have indeed fallen 40% in the last year. The shares have been on a steady decline since early 2014 and I see no reason why it won’t continue. 

Transformational merger

Ladbrokes  (LSE: LAD) is on the verge of completing an impressive merger with Coral Group. The enlarged business will be a market leader and own just under 4,000 betting shops. Recently the company got the all clear on the deal from the Competition and Markets Authority provided the company sells 300-400 shops. This should be a simple transaction for the company and I expect it to go through without a problem. 

The deal will create £65m of cost synergies per annum and boost online growth for Ladbrokes. This is key going forward as the online segment is where Ladbrokes has historically struggled. The company currently pays a chunky dividend yield of over 4% and looks set to post some impressive earnings growth in the next few years. 

Flying takeaway

Online company Just Eat  (LSE: JE) is moving from strength to strength at the moment. In the last three months shares are up 17% and I believe they could go much further. The company has already upgraded earnings forecasts for 2016 once and could easily do it again. The shares are trading on a forward price-to-earnings ratio (P/E) of just 29 for 2017. To me, this is relatively cheap for a growth company with the potential of Just Eat. 

The company also benefits from first-mover advantage. Just Eat was the first company to get into the online takeaway space and any competitors will find it incredibly hard to displace Just East at the top. In my opinion Just Eat could see another 20% increase in its share price this year if targets are met. 

Looking at the short interest in stocks is a valuable exercise in my investment research and I would recommend all private investors use the FCA resource.

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Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.