What a torrid 2018 it’s been for holders of stock in Cardiff-based IQE (LSE: IQE). Once adored by the market, the semiconductor supplier’s shares have dropped 55% in value since January.
As summarised by Foolish colleague Roland Head earlier this month, the latest setback to hit the £480m cap relates to a fall in orders for its 3D sensing laser diodes, used in facial recognition systems in top-end smartphones.
Rather than ruminate on the sustained fall (I own a small number of shares), I’m using this as an opportunity to remind myself of the perils of going against the crowd, at least in the short term.
Right now, IQE’s stock is the 10th most-shorted share on the London Stock Exchange. That means that a not-insignificant number of market participants are convinced that the share price of the company will continue to fall. In an attempt to profit from this, they’re borrowing stock to sell on, with the intention of buying it back at what they hope is a lower price.
Short-selling is a risky endeavour. Get it wrong and there’s theoretically no limit to how much money you can lose. So far, however, this strategy has worked with IQE.
But don’t for one minute think that previously-hot growth small-cap stocks are the only companies being targeted. One of the most recognised businesses on the high street, Marks & Spencer (LSE: MKS), is even more hated.
At the time of writing, 11.3% of its stock is currently being shorted, leaving the FTSE 100 retail giant five places above IQE in the leaderboard. To put this in perspective, that’s two places higher than long-suffering Debenhams.
Given that its shares are still around the same price they were at the start of the year (in contrast to the 80% fall in the value of its retail peer), is this an ominous sign that M&S could be the next heavy faller?
It’s not hard to see why M&S has been targeted. The lure of online shopping has led fewer shoppers to bother making their way to the cold, wet high street. Lower footfall translates to lower sales and with such a large estate, it was asking too much for M&S to neatly sidestep the woes experienced by other retailers.
Arguably more worrying however, is the fact that its once highly successful food offering — which makes up a significant proportion of revenue — is now underperforming. When even the jewel in your crown is struggling, it’s no surprise if shorters begin circling.
That’s not to say that M&S is uninvestable. A forecast 18.7p per share dividend for the 2018/19 financial year translates to a chunky yield of 6.2% based on the firm’s current share price. At a time when the top-paying easy access Cash ISA offers interest of 1.4%, that’s got to be appealing for income-seekers. IQE doesn’t pay a dividend. Moreover, there are signs that the company’s highly experienced management team is starting to take decisive action through store closures and cost-cutting.
Clearly, the current negativity surrounding M&S could see the shares continue to fall in the weeks and months ahead. Even so, an IQE-style spanking looks unlikely given the dividends on offer. If you’re prepared to be extra-patient, I still believe there’s money to be made, especially as the stock already trades on a reasonable (but not screamingly cheap) 12 times earnings.
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Paul Summers owns shares in IQE. 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.