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A FTSE 100 retail stock I wouldn’t touch with free money

One thing I like to keep an eye on when analysing stocks is the list of the most-shorted ones in the UK. To recap, shorting is the process of betting on a company’s share price to fall. If a company is being heavily shorted by hedge funds and other sophisticated investors, you have to be careful, in my view, because it means there could be something wrong with it. Just look at Carillion last year. It was heavily shorted all year and ended up going into liquidation, meaning investors lost everything.

Today, I’m looking at two UK retail stocks, including a FTSE 100-listed retail giant, that are currently high up on the most-shorted list and, therefore, I’m avoiding.

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Marks & Spencer

According to shorttracker.co.uk, Marks & Spencer (LSE: MKS) is the third most shorted stock in the UK right now (after Pets at Home Group and Kier Group), with an 11.7% short interest. This doesn’t surprise me, to be honest. In a retail world that’s been significantly disrupted by the likes of ASOS and Amazon over the last decade, Marks & Spencer appears to have been left behind, and its prospects going forward look concerning.

The main problem with M&S, in my view, is that its clothing offering is not focused enough. I actually popped into a store in London yesterday, and I left quite unimpressed. To my mind, Marks’ clothes don’t offer value (they could improve their basics range for a start), they don’t offer quality like they used to, and they don’t offer the latest fashion. That leaves the group in dangerous territory – what’s the competitive advantage? If you look at the retailers that are successful in the current environment, you’ll see that they tend to be way more focused in their approach, with a specific offering, aimed at specific market, and a strong online presence. Marks has a long way to go to turn things around. 

The group released half-year numbers last week, and sales for the period were down 3.1%. While CEO Steve Rowe told investors that the retailer has reorganised into a family of “strong businesses”, I’m not convinced. And neither are the hedge funds, as short interest has increased over the last month. As such, I’m avoiding MKS shares for now, despite its low P/E of 12, and yield of 6.1%.

Debenhams

Similarly, Debenhams (LSE: DEB) is another retail stock I wouldn’t touch at the moment. It’s currently the seventh most shorted stock in the UK, according to shorttracker.co.uk, with a 10.5% short interest.

One thing we’re seeing at the moment (and this applies to MKS too) is that, in general, the traditional department store retail model is no longer working. We’ve had House of Fraser go bankrupt recently, and the same thing has happened in the US, with retail giant Sears going under too. Clearly, buying habits have changed in recent years as online shopping has become so much easier.

Debenhams reported preliminary results a few weeks back and the numbers weren’t good, with like-for-like sales falling 2.3% and underlying profit before tax plummeting 65.1%. Furthermore, debt was up, and the final dividend was cut, meaning the overall payout for the year was just 0.50p per share, down from 3.425p last year.

Overall, the outlook for Debenhams is grim, in my view. As such, I’m avoiding the shares.

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Edward Sheldon has no position in any shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and ASOS. 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.