Muddy Waters’ recent attack on litigation specialist Burford Capital is a reminder of just how much impact short sellers can have on a company’s share price.
Today, I’m looking at three other firms — all from the market’s second tier — that feature towards the top of the most-shorted leaderboard and asking whether those already holding these stocks should be concerned.
In the firing line
Cinema owner Cineworld (LSE: CINE) might not be the first company that springs to mind when discussing short-sellers. After all, 2019 has already seen the release of blockbusters such as Toy Story 4 and Avengers: Endgame with the much-anticipated Star Wars Episode IX due for release in December.
As my Foolish colleague Royston Wild mentioned earlier this month, however, recent trading hasn’t been great with dips in revenue, profit and admission numbers. The recent glorious weather in the UK won’t have helped matters and some investors may still be concerned by the sheer amount of debt on the balance sheet as a result of its $3.6bn acquisition of Regal Entertainment. Perhaps, then, it’s understandable that 7.2% of Cineworld’s stock currently being shorted.
I suspect the shares will recover in the medium term (and shorting interest decrease) once the great weather disappears and profits stabilise. In the meantime, Cineworld’s stock trades on slightly under 9 times expected FY19 earnings and yields 6.8%.
A FTSE 250 member with 7.3% of its stock being shorted is Jupiter Asset Management (LSE: JUP). That’s a slightly lower percentage than earlier in the year, but still enough to raise an eyebrow from holders.
Like other asset managers, Jupiter continues to be hit by the rise in popularity of passive investing with more people than ever moving their savings to cheap(er) products that seek to replicate rather than beat the market return. The negative publicity generated by the gating of Neil Woodford’s Equity Income Fund hasn’t helped sentiment toward the industry either.
A forecast price to earnings (P/E) ratio of 12 suggests this pessimism is priced-in and that a 7.1% yield is worth the risk but this valuation is actually pretty average compared to peers and dividend cover is on the slim side at 1.15 times profits. Moreover, the growing possibility of a recession in the not-too-distant future could hit Jupiter hard as people rush to withdraw their money. As such, I think there are probably safer opportunities elsewhere.
CFD-provider Plus 500 (LSE: PLUS) is yet another FTSE 250 stock under pressure. It’s also got something of a track record with short sellers.
Back in January, I highlighted that the company had climbed to the top of the market’s ‘most-hated’ leaderboard. Only a couple of weeks later, Plus’s value plummeted after it warned on profits. It’s still well over 50% lower in price today than where it was at the beginning of February.
Considering that 6.8% of its stock is still being shorted, it seems some in the market think there could be more pain ahead, perhaps due to ongoing concerns surrounding new regulations on the industry or speculative traders losing interest in Bitcoin (Plus benefits hugely from the cryptocurrency craze).
Since it hasn’t generated anywhere near the same level of interest from the shorting community, I believe IG Group remains a safer pick over Plus just now, even if the latter’s battered valuation (7 times forecast earnings) does stir my contrarian tendencies.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Paul Summers owns shares in IG Group. 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.