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FTSE 250: I’d avoid these shares because hedge funds expect them to fall

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One thing I always keep an eye on as part of my investment research is the list of the most shorted stocks on the London Stock Exchange, including the FTSE 250. The stocks on this list are those that hedge funds and institutional investors are betting against heavily. You can find the list at shorttracker.co.uk.

Now, the hedge funds don’t always get it right. Not every heavily shorted stock falls in value. Yet quite often, these sophisticated investors do get it right. Just look at some of the FTSE companies that have been shorted heavily by the hedge funds in recent years – Carillion, Thomas Cook, Debenhams… all of these companies turned out to be shocking investments.

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With that in mind, today I want to highlight two FTSE 250 stocks that are being heavily shorted right now. Given the high level of short interest here, I’d steer well clear of these companies.

Hedge funds smell blood here

According to shorttracker.co.uk, the most-shorted stock on the London Stock Exchange is currently FTSE 250 real estate investment trust Hammerson (LSE: HMSO). It has short interest of 12.6%, with nine funds shorting it.

It’s not hard to see why the hedge funds don’t like this stock. Hammerson owns and operates a number of prime shopping centres in the UK and Europe. Its portfolio currently contains 21 flagship destinations, eight retail parks, and 20 premium outlets. There are two issues here. Firstly, the forced closure of non-essential retail stores has devastated rent collections. Last week, Hammerson advised that it had collected just 16% of rents in the UK in the last quarter. Secondly, the coronavirus lockdown has changed the way we shop. Going forward, a lot more of our shopping will be done online. That could impact the company’s operating environment in the future.

Hammerson recently negotiated some headroom with its creditors until 31 December 2021. It also advised that it is confident that rent collection rates will improve materially in the near term. I’d still avoid the FTSE 250 stock though. The hedge funds clearly smell blood here.

A FTSE 250 company seeing major challenges

Another FTSE 250 stock that is being heavily shorted right now is Royal Mail (LSE: RMG). It’s currently the third most shorted stock on the London Stock Exchange according to shorttracker.co.uk. It has short interest of 9.1% with seven funds short.

Again, it’s not hard to see why the hedge funds don’t like this FTSE 250 stock either. This a company with some serious challenges to work through.

In its recent full-year results, issued on 25 June, Royal Mail provided two potential scenarios of how the business could perform in 2020-21. In the first scenario, which assumed a UK GDP decline of 10% for the period, it said revenue from its UK operations could be between £200m to £250m lower year-on-year. Meanwhile, in the second scenario, which assumed a UK GDP decline of 15%, it said UK revenue could be between £500m to £600m lower year-on-year. The company also said that it expects its UK division to be “materially loss-making” in 2020-21.

Royal Mail is a stock I’ve been bearish on for a while now. The high level of short interest here just reinforces my view. I’d steer well clear of this FTSE 250 share and look for more attractive investment opportunities.

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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.

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