When a stock is ‘shorted’, it essentially means that investors borrow shares then sell them with the aim to buy them back, hoping that they’re available at a lower price than they sold them for. These short-sellers rely on the fact that the stock’s price is continuously falling, which obviously isn’t a good thing.
These two shorted stocks are understandably unloved by investors but I believe that they have much more on offer than meets the eye.
Publishing success
Pearson (LSE: PSON) is a publishing and education company that’s sadly the tenth most shorted stock in the UK. The company has ventured down a very rocky road in recent years, the share price dropping to a 10-year low in 2017. However, I believe that the future remains bright for the firm and the shares could be are set to rebound on the back of its strength in digital education. Many investors seem to be overlooking the fact that the company has been investing in digital education services and how much this could benefit the business.
Pearson is aiming to launch an AI maths tutor app and an AI essay app for the next school year. This is a huge step forward as the company could soon lead the digital education market if it continues to go down this route.
It hasn’t had the worst start to 2019 either with overall revenue already up 2% on the previous year. The shares are currently priced around 830p with a steady dividend yield of 2.24%, which has healthy dividend cover of 2.8. The extent of that cover and the firm’s prospects thanks to the positive outlook for the education sector mean I would expect to see this yield rising in the future. Analysts predict that the e-learning market will be worth $325m by 2025, growing over 7% year-on-year. As Pearson is now focusing more on e-learning, I truly believe this stock is a worthy long-term investment.
Getting defensive
Ultra Electronics (LSE: ULE) is a defence firm that’s also a very commonly shorted stock. The shares come with a great deal of scepticism thanks to the 2017 departure of CEO Rakesh Sharma that came with a profit warning, and the Serious Fraud Office last year opening a criminal investigation into the company over suspected corruption.
The business today is on a more even keel and its accounting is much more transparent. But this isn’t the only reason I would be keen to invest.
Ultra’s share price has been on the rise since jumping a huge 7% in March following an increased dividend due to a strong 2018 second half. Analysts predict earnings will rise 15% this year and a further 7% in 2020. Furthermore, the decent dividend yield of 3.2% is also covered 2.3 times. These numbers look very healthy to me and I believe the tide is set to turn when it comes to the scepticism surrounding Ultra.
As the company continues to grow, I believe that the focus will turn to its strong portfolio of defence assets and the potential to make money through this stock, rather than its troubled recent past.
