Marks & Spencer’s share price just got hammered. Here’s how you could have avoided the loss

Marks and Spencer Group plc (LON: MKS) just announced a dividend cut. But Edward Sheldon says he is not surprised.

| More on:

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.

Yesterday was a rough day for Marks & Spencer (LSE: MKS) shares as the share price fell over 12% after the company announced a £600m rights issue and a 40% cut to its dividend. Naturally, many investors were unimpressed with this dividend news (MKS has always been a popular income stock) and dumped the shares. You can read more about yesterday’s announcement in this article by my colleague Paul Summers.

Today, I want to look at the announcement and subsequent share price fall from a slightly different angle and explain how investors could have easily avoided this double whammy of a dividend cut and share price crash. By paying attention to this one thing, investors could have potentially spared themselves considerable pain.

Always watch the shorters

One thing I often stress is that it’s important to keep an eye on the list of the most-shorted stocks. You can find this at shorttracker.co.uk. These are stocks that hedge funds and other sophisticated investors are predicting will fall in price.

Only a few months ago, in November, I warned readers that Marks & Spencer was actually the third most-shorted stock on the London Stock Exchange and that the number of shares being shorted was increasing. As a result, I said that MKS was a retail stock I wouldn’t touch even with free money. That call looks good right now as the stock is down nearly 15% since then and income investors have also seen their income slashed.

The shorters often get it right

The thing to understand about shorting is that when the professionals short a stock, they usually have a pretty good reason for doing so.

Whereas the market is full of ‘weak’ long investors (for example, funds that simply own a stock because it’s in an index), you rarely find weak shorts. Usually, the shorters are absolutely convinced that something is wrong with the company when they short a stock. 

And whether the problem is related to revenue, profits or cash flow, the shorters often get it right. Just look at Carillion, Kier Group, and Metro Bank – three stocks that were shorted very heavily in recent years and have seen their share prices take a beating. In Carillion’s case, investors lost everything.

So, if a stock is highly shorted, it’s worth being careful. Often, the best approach, in my opinion, is to simply steer clear.

Be careful of these stocks

Looking at the list of most-shorted stocks, other names that are high up on the list at present include Ultra Electronics, Arrow Global, Debenhams and Pearson. All four of the stocks have at least 10% of their shares being shorted, which tells us that professional investors see issues they don’t like and are betting significant amounts of money that the share prices of these companies will fall. With that in mind, I think it’s worth approaching these stocks with caution right now.

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

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »