Carillion plc isn’t the only stock I’ll be avoiding in 2018

Edward Sheldon looks at the most shorted stocks in the UK right now, including Carillion plc (LON: CLLN) and explains why he won’t be going anywhere near them in 2018.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While there are plenty of stocks I want to buy 2018, there are also several I’ll be steering clear of. Here’s a look at some of them.

Carillion

As far as dud investments go, it doesn’t get much better than Carillion (LSE: CLLN) this year. Shares in the construction services company have fallen from around 240p at the start of the year, to just 17p today. That’s a decline of a staggering 93%. What went wrong?

It all went downhill in July when the company released a nasty profit warning. It stated that a deterioration in cash flows on a number of construction contracts had led the board to undertake a review of the group’s material contracts. That review resulted in expected contract provisions of £845m.

But it got worse. A further profit warning in November revealed that profits for the year are expected to be “materially lower” than current market expectations. The company also said that it was expecting a covenant breach as at 31 December and that “some form of recapitalisation” would be required.

What a nightmare. I feel for investors who have lost money here. A 93% loss is extremely hard to recover from. To break even, you’d need a gain of a huge 975%.

Yet, there were warning signs here. A large proportion of the company’s shares were being shorted. I explained that in this article.

The lesson we can take away is that it’s always worth keeping an eye on the list of companies that are most shorted. Hedge funds and other sophisticated investors are betting on the share prices of these companies falling. And there’s usually a good reason why.

If a company has a seriously heavy short interest, just steer clear. It’s as simple as that. At one stage, 30% of Carillion’s shares were being shorted. This indicates that there was something drastically wrong with the company. And the shorters were right.

Looking at the short interest now, Carillion is still the most shorted stock in the UK, with 13 funds shorting it.

For this reason, I won’t be investing in Carillion any time soon. 

Other shorted stocks to avoid

So what are the other most shorted stocks in the UK right now? From Shorttracker here’s the top 10 most shorted stocks.

Company % short Number of funds short
CARILLION PLC 16.60% 13
DEBENHAMS PLC 14.30% 8
OCADO GROUP PLC 14.30% 11
WM MORRISON SUPERMARKETS 12.00% 12
PREMIER OIL PLC 11.30% 5
SAINSBURY (J) PLC 11.20% 10
MARKS & SPENCER GROUP PLC 10.90% 12
PEOPLE’S OPERATOR PLC (THE) 10.60% 1
AGGREKO PLC 10.50% 8
TELIT COMMUNICATIONS PLC 10.40% 4

Source: Shorttracker. Data as of 20/12.  

You can see that there’s a strong focus on the UK high street there, with companies such as Debenhams, WM Morrison Supermarkets and Marks & Spencer Group all making the list.

One stock that looks particularly dangerous to me is Ocado. While the company has exciting growth prospects, the valuation just looks way too high, in my opinion. Expected earnings of 1.56p next year place the stock on a forward P/E of 230. That’s a recipe for disaster. As a result, the chances are I won’t be buying Ocado shares next year.

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.

Edward Sheldon has no position in any 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »