Bullish on Boohoo

The capture of Debenhams looks sound for a few reasons. First, it shows the level of Boohoo’s ambition. By marking its foray into new markets — beauty, sports and homewares — the company can’t be accused of resting on its laurels. Developing “the UK’s largest marketplace” should ensure it reaches an even wider audience with an increasing number of brands. On top of this, the Debenhams acquisition also gives Boohoo another route to selling its own clothes. These now include more ‘mature’ labels such as Oasis and Coast as well as the hyper-popular PrettyLittleThing. 

Then there’s the price tag. For £55m, the Manchester-based business will adopt and relaunch a website that receives 300 million or so visits per annum. It also made roughly £400m in revenue last year. When one considers that Boohoo isn’t taking on the burden of any of the physical stores or stock, that looks like a blinding deal. 

Other attractions

Another reason for me thinking Boohoo’s share price could rise over the next few years relates to the current valuation. A price-to-earnings (P/E) ratio of 32 looks increasingly reasonable for a company making money hand over fist, even during a pandemic. The argument becomes even stronger to me when it’s considered that many loss-making companies across the pond are trading at bubble-like prices. 

Evidence of a speedy fix to the supply chain problems that dogged the company last year should add more pennies to the Boohoo share price. In fact, the Environmental Social Governance (ESG) funds that were quick to dump their holdings may suddenly find themselves needing to pay a far higher price to buy back in. 

So, Boohoo is bulletproof?

I wouldn’t go that far. While bullish on the AIM-listed star’s future, I also think it’s vital to speculate on what may go wrong.

For one, Boohoo’s growing list of brands could become problematic. As competent as management appears to be at integrating acquisitions, there’s a risk it may be attempting to spin too many plates too soon.

There’s also a possibility that Boohoo might lose its popularity among its key demographic, namely young women. Fashion is a truly fickle industry. There’s only so far savvy marketing and a strong social media presence will take you.  

As far as the shares are concerned, Boohoo could even fall victim to a flight to value in the near term. This wouldn’t be unreasonable. Some high-quality, high growth UK stocks made investors rich in 2020. The Boohoo share price has doubled since the dark days of March 2020. Some eventual profit-taking is inevitable.

Just the start

But ultimately, where the Boohoo shares go in the next few weeks and months is irrelevant to me. As a long-term holder, I place more importance on the company taking advantage of opportunities now to reap the rewards later. The Debenhams deal is a good example of this. In fact, I’d be surprised if further acquisitions weren’t announced soon. Without a doubt, Boohoo has the cash to splash.

The post Here’s why I think the Boohoo share price is just getting started appeared first on The Motley Fool UK.

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Paul Summers owns shares in boohoo group. The Motley Fool UK has recommended boohoo group. 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.

Unfortunately, that’s exactly what’s happened to a household name from the FTSE 250, at least according to shorttracker.co.uk. And, no, it’s not a struggling retailer or a risky oil play. 

Debt-ridden

Shares in Cinema chain Cineworld (LSE: CINE) have fallen heavily in recent months and, based on shorting activity (11.5% at the time of writing), a significant minority of traders think there’s more pain to come. 

Much of the concern appears to stem from the company’s takeover of US rival Regal Entertainment and the huge impact this has had on its balance sheet. In August, Cineworld sought to quell these fears by announcing that reducing this burden was “ahead of schedule” following the repayment of $570m in term loans. Nevertheless, recent share price action (and the fact that adjusted net debt of $3.3bn is still almost 20% more than the company’s entire market cap) suggests that not everyone is convinced this sort of progress will continue. Nor does everyone think that synergies from the acquisition will come in as high as the estimated $150m. 

But debt isn’t the only potential weakness in the investment case. 

As star fund manager Terry Smith remarked during a speech earlier this year, most companies involved in the entertainment industry in some capacity have very little visibility when it comes to predicting earnings. Even critically-acclaimed films can do badly and ‘guaranteed blockbusters’ can bomb. On top of this, cinema operators have to contend with the growth in popularity of streaming services such as Netflix, Amazon Prime and, more recently, Disney+ (although the last of these won’t become available in the UK until next year). This doesn’t necessarily spell doom for trips to the flicks, but it must be considered by anyone thinking of investing. The more popular streaming becomes, the more management need to drop prices to lure people out of their homes. That’s particularly problematic for companies such as Cineworld considering the amount of money it is spending refurbishing its screens. 

Contrarian bet?

Having lost a third of their value since April, the shares currently trade on just 8 times forecast earnings. That’s usually the sort of valuation that gets value investors salivating. The company is also expected to return a total of 18.3 cents per share in the current financial year, which equates to a chunky yield of 7.1%. At the moment, it looks like profits will cover this amount. However, the aforementioned risk of earnings underperformance if presumed hits like the new Star Wars, James Bond and Top Gun films fail to grab audiences could make the threat of a cut more likely. 

There’s something in the suggestion that cinemas might be more resilient in the event of an economic downturn when compared to other, more expensive forms of entertainment, but I struggle to believe that operators such as Cineworld will thrive in such a scenario. Factor in the short interest, and I’m content to let this ‘opportunity’ pass me by.

The post There’s a NEW most-hated stock on the market. Do you own it? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the 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.

Unfortunately, this means that anyone who owned shares probably won’t see any money back.

I feel sorry for any shareholders that have lost money here. It’s never nice to see your wealth disappear when a company’s shares are delisted. Investing really can be brutal at times. Having said that, I did try to warn investors that something like this could happen with Debenhams shares.

Be careful of the shorters

In an article in November, I explained I wouldn’t go anywhere near Debenhams shares due to the fact they were being heavily shorted by hedge funds. This is where hedge funds are betting on a stock to fall. 

The key thing to understand about shorting is that hedge funds usually only short a stock if they believe there is something seriously wrong with the company. When you buy a stock the normal way (going long) the most you can lose on it is 100%. However, when you short a stock, you’re theoretically exposed to unlimited losses if the stock keeps rising, so shorters have usually done their research and have a very good reason to go short. 

Given that Debenhams was one of the most shorted stocks on the LSE in November with over 10% of its shares being shorted, I said that the outlook for the stock was “grim” and that I would be avoiding it. 

The shorters don’t always get it right, but it’s amazing how often they do. Just look at stocks such as Carillion, Kier Group and Metro Bank. All three of these stocks have been shorted heavily in the recent past and have been total disasters for shareholders. The bottom line is that if a stock has more than 5% short interest, it pays to be careful. So, what other stocks are heavily shorted right now?

Highly-shorted stocks 

Looking at the list of the most-shorted stocks on the LSE, which can be found at shorttracker.co.uk, the stocks at the top of the list include:

• Arrow Global Group

• Metro Bank

• Debenhams

• Anglo American

• AA

• Marks & Spencer Group

• Pearson

• Ultra Electronics

• IQE

• Pets at Home Group

All of these stocks have more than 7% of their shares shorted right now meaning that hedge funds and other sophisticated investors are making big bets that these stocks will fall in price. With that in mind, if you’re an investor in any of these stocks, or considering investing, I’d be very careful. Sometimes, it’s better to play it safe.

The post Debenhams shares just got delisted. Don’t say I didn’t warn you appeared first on The Motley Fool UK.

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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.

The shares are currently suspended and, while stores continue to trade, remaining shareholders, including Ashley, will likely be wiped out. Investing can be brutal sometimes.

That said, I do believe Debenham’s situation is a useful reminder of things that Foolish investors always need to be on the lookout for.

1. Big debt

Debenhams has debt — £621m of it. By contrast, the market capitalisation of the whole company was just £23m or so when shares were suspended on Tuesday. 

One of the first things to look for when sizing up a potential investment — particularly in uncertain political and economic times — is how much debt the company carries. Ideally, it won’t have any at all, or at least a net cash position (i.e. more cash on the balance sheet than debt).

The amount of money owed by a company can be found in its latest set of results, although bear in mind that the gap between when this number is calculated and then revealed to the market can be several months.  

2. Failing to adapt

Another huge issue with Debenhams was its failure to adapt to changing consumer tastes quick enough. As more of us moved online to do our shopping, the company saw a significant drop in the numbers of people visiting its tired stores (which also have expensive, long-term leases).

There’s also something to be said for monitoring a retailer’s image among consumers. If you or people you know wouldn’t shop there, why hold its shares? Alternatively, ask yourself whether you’d create the company today if it didn’t already exist. If you wouldn’t, that’s a warning sign.

3. High short interest

I’ve recently become increasingly interested in the activity of short sellers. For those new to investing, these are people bearish on a company’s future and therefore bet on its share price falling. 

Since their losses are technically infinite if a share price jumps, short sellers must be confident in their research. No surprise that Debenhams has been one of the most shorted stocks on the market for some time.

If you’ve purchased any company’s shares without proper research and notice the amount of short-selling has increased, or is high, you may want to question whether it’s a good idea to remain invested.

Get out while you can

Here at the Fool, we’re fans of investing for the long term. Trading shares might sound exciting but it’s actually hard to do well on a consistent basis. Moreover, the high commissions you pay inevitably eat into whatever profit you are able to scratch out. 

Nevertheless, it can sometimes be right to sell if you spot trouble ahead. Taking a loss is painful, but you’ll be thanking yourself if the company later suffers the same fate as Debenhams.

Its shares were priced around 54p two years ago. They were suspended at 1.83p. There was plenty of time to get out and yet many didn’t. Sometimes, it pays to trust your gut.

The post 3 things the Debenhams debacle reminds Foolish investors appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the 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.

It’s certainly not bad news, but should investors really be piling back into this troubled stock? Let’s take a closer look.

What’s changed?

Debenhams has secured the financing facility for 12 months. Interest costs will be fairly high and may rise in April, according to the firm. However, this isn’t intended to be a long-term loan. The new facility is intended to acts as a bridging loan to give the company time to arrange “a broader refinancing and recapitalisation.”

The company has also announced a new sourcing agreement for own-branded goods with Li & Fung, a Hong Kong-based giant in the supply chain sector. This is expected to cut costs and improve product quality in the future. But, in my view, it’s a sideshow compared to the company’s financial difficulties.

Why I’d stay away

Debenham’s biggest problem at the moment is that it has too many large stores on long, expensive leases. In its most recent accounts, the company reported minimum lease payments due of £102m in the next five years, and of £200.5m in the next 10 years.

In addition to this, the department store retailer reported net debt of £286m in early January.

For a company whose underlying operating profit has fallen from £128.6m to £43.4m over the last five years, these figures look unsupportable to me. Refinancing is expected to include agreeing significant rent reductions with landlords. I suspect that some of the company’s debt may also be exchanged for new shares in the business.

To persuade lenders and landlords to agree to a refinancing, shareholders are likely to have to supply fresh cash, or have their stake in the company cut significantly.

In my view, investing ahead of such a deal is highly risky. I’d use today’s price rise as a selling opportunity. I think there’ll be plenty of time to buy cheap shares after the company has refinanced.

This stock could double

FTSE 250 oil and gas producer Premier Oil (LSE: PMO) also has too much debt. But the company completed a refinancing deal in 2017 and is now making steady progress with debt reduction.

The group recently said it expected to report net debt of $2.3bn at the end of 2018, $100m less than its previous guidance of $2.4bn.

Full-year production hit a new record last year, averaging 80,500 barrels of oil equivalent per day (boepd). Although group production is expected to fall to 75,000 boepd this year due to various asset sales, profit margins are expected to improve. Premier expects to be able to continue repaying debt as long as oil prices remain above $45 per barrel in 2019.

I normally avoid investing in companies with high levels of debt, but I do own shares in Premier Oil. I think that the stock’s 2019 forecast price/earnings ratio of 4.2 should rise to a more normal level as debt falls. In my view, the shares could easily double in the next 18 months.

The post Why I’d sell 30% riser Debenhams and buy the Premier Oil share price appeared first on The Motley Fool UK.

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Roland Head owns shares of Premier Oil. 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.

Not my department

Debenhams is company reviled, just like billionaire part-owner Philip Green. Edward Sheldon recently said he wouldn’t touch it with free money. Green has sinned but the high street is in general meltdown, and the department store model is looking broken.

The stock is down another 7.62% this morning following publication of a Christmas trading update that showed group like-for-like sales down 3.4% in the six weeks to 5 January, and by 5.7% measured over 18 weeks. Weak store footfall was offset by growth in digital, though, with sales up 4.6% over 18 weeks. Optimists will note that Debenhams failed to issue its traditional Christmas profit warning.

Fashion disaster

Today’s update blamed the volatile and challenging UK trading environment, as all retailers do these days. This forced Debenhams into “tactical promotional activity in order to be competitive,” slashing prices in other words, which will erode first-half margins.

Debenhams said it continues to generate cash and has cut net debt from £321.3m to £286m, comfortably within committed debt facilities of £520m. It’s looking to refinance existing bank facilities within the next year, and bring in new sources of funding after turning down Ashley’s offer of a loan. An annual £50m of planned savings will be upped to at least £80m.

On the rack

Investors clearly aren’t pinning too much faith on management’s claim that it remains “on track to deliver current year profits in line with market expectations, supported by further identified cost savings.” Analysts are forecasting an 81% drop in earnings in the year to 31 August 2019, although 66% growth the year after. There is no dividend.

Management has so far failed to convince the market that it has a strategy to turn things round. In contrast to Sheldon, I would invest with free money, just not my own.

Gassing on

Nostrum Oil & Gas (LSE: NOG), an independent oil and gas company focused on the pre-Caspian Basin, has also had a rough time of it lately. It’s falled 51% in three months, yet still boasts a far larger market-cap than Debenhams at £217m.

Nostrum has fallen despite making encouraging progress in its operational activities, with sales volumes rising due to the successful testing of site Well 40, while announcing the mechanical completion of the GTU3 project on 24 December, with the facility set to be commissioned this year.

Crude facts

The falling oil price undermined the good news, although investors have been boosted by the recent rally, and Nostrum is up 10% in the last week.

The explorer’s financial results for the nine month to 30 September showed revenues creeping up 2.5% to $311.4m, and net operating cash flows rising 9.4% to $187.7m. Cash stood at $102.4m against total debt of $1.1bn. City analysts are optimistic, forecasting 43% growth in earnings this year, and 23% in 2020. It’s clearly risky, but I would buy it ahead of Debenhams.

The post One of these high-risk stocks could make you rich, but I wouldn’t touch the other appeared first on The Motley Fool UK.

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harveyj has no position in any of the 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.

Today, I’m looking at two UK retail stocks, including a FTSE 100-listed retail giant, that are currently high up on the most-shorted list and, therefore, I’m avoiding.

Marks & Spencer

According to shorttracker.co.uk, Marks & Spencer (LSE: MKS) is the third most shorted stock in the UK right now (after Pets at Home Group and Kier Group), with an 11.7% short interest. This doesn’t surprise me, to be honest. In a retail world that’s been significantly disrupted by the likes of ASOS and Amazon over the last decade, Marks & Spencer appears to have been left behind, and its prospects going forward look concerning.

The main problem with M&S, in my view, is that its clothing offering is not focused enough. I actually popped into a store in London yesterday, and I left quite unimpressed. To my mind, Marks’ clothes don’t offer value (they could improve their basics range for a start), they don’t offer quality like they used to, and they don’t offer the latest fashion. That leaves the group in dangerous territory – what’s the competitive advantage? If you look at the retailers that are successful in the current environment, you’ll see that they tend to be way more focused in their approach, with a specific offering, aimed at specific market, and a strong online presence. Marks has a long way to go to turn things around. 

The group released half-year numbers last week, and sales for the period were down 3.1%. While CEO Steve Rowe told investors that the retailer has reorganised into a family of “strong businesses”, I’m not convinced. And neither are the hedge funds, as short interest has increased over the last month. As such, I’m avoiding MKS shares for now, despite its low P/E of 12, and yield of 6.1%.

Debenhams

Similarly, Debenhams (LSE: DEB) is another retail stock I wouldn’t touch at the moment. It’s currently the seventh most shorted stock in the UK, according to shorttracker.co.uk, with a 10.5% short interest.

One thing we’re seeing at the moment (and this applies to MKS too) is that, in general, the traditional department store retail model is no longer working. We’ve had House of Fraser go bankrupt recently, and the same thing has happened in the US, with retail giant Sears going under too. Clearly, buying habits have changed in recent years as online shopping has become so much easier.

Debenhams reported preliminary results a few weeks back and the numbers weren’t good, with like-for-like sales falling 2.3% and underlying profit before tax plummeting 65.1%. Furthermore, debt was up, and the final dividend was cut, meaning the overall payout for the year was just 0.50p per share, down from 3.425p last year.

Overall, the outlook for Debenhams is grim, in my view. As such, I’m avoiding the shares.

The post A FTSE 100 retail stock I wouldn’t touch with free money appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and ASOS. 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.

Are investors right to cheer these results, or should we stay away as chief executive Sergio Bucher fights to keep the department store group afloat?

I’ve been looking at today’s numbers to decide whether to invest.

Profits down 65%

The year to 1 September was a bad one for Debenhams. Underlying pre-tax profit fell by 65% to £33.2m, while sales fell by 2.5% to £2,277m.

The group’s underlying operating profit margin dropped from 4.6% in 2017 to just 1.9% last year.

Unsurprisingly, the dividend has now been cancelled. I wouldn’t expect a payout for the foreseeable future.

Store headaches

In a presentation to analysts today, the firm said that 10 stores were now loss-making and that 110 stores are “over-rented”.

What this means is that Debenhams is paying more than the current market rent for the store space. The firm is a victim of the UK system of upward-only rent reviews on commercial property leases. Until the lease is renewed, the rent can’t be cut.

Unfortunately, the firm’s stores have an average of 18 years remaining on their leases.

To try and improve the situation, the company will focus on upgrading the 100 most profitable stores. These are said to account for 80% of sales and more than 80% of profit.

A further 20 stores will be optimised — basically run as cheaply as possible, hopefully with rent reductions.

About 50 stores are earmarked for closure over the next three to five years. This is likely to be expensive — the company announced a charge of £117.5m for “store impairments and onerous lease charges” today.

IOU

The other big concern for me is debt. Net debt rose by £45.4m to £321.3m last year. That’s 2.1 times earnings before interest, tax, depreciation and amortisation (EBITDA).

I usually look for a maximum of 2x, so this doesn’t sound too bad. And new finance boss Rachel Osborne is targeting an extra £50m of cost savings by 2020 to help prevent debt rising further.

However, I’m not convinced that these sums will add up. In each of the last two years, Debenhams has spent about £100m on store upgrades and other developments. The firm has also spent about £30m on essential capital expenditure such as maintenance.

Despite this, only nine stores are trading in the new format. So another 91 are still due to be upgraded. I don’t see how this can be completed without debt rising further.

Signs of hope?

One positive note in today’s results was that the firm’s new-format stores are said to be trading better than comparable old-style stores. Additional food and drink concessions are also said to be performing well.

Internet growth continues, with digital sales up 16% during the second half of the year. Fashion rival Next reported a 16.8% increase in online sales over roughly the same period, so I guess that’s a respectable figure.

However, Debenhams said today that it expects “no improvement in the trading environment for the foreseeable future”.

My view is that this business will probably survive, but it’s likely to need an injection of fresh cash at some point. This could be highly dilutive for shareholders, so I’d avoid this stock for now.

The post Is the Debenhams share price set for a rebound? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the 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.

Speculation is already being aired that Mike Ashley, who recently bought up failing rival House of Fraser and who already holds a stake of almost 30% in Debenhams, might be set to step in.

Debenhams has been struggling with the near-crippling retail crisis that has seen a number of names disappearing from our streets — like Maplin and Toys ‘R’ Us, to name two big ones. Could Debenhams really be going the same way? Well, rival Marks & Spencer has been having trouble too and is set to close around 100 stores, so it’s far from unthinkable.

Profit warnings

With high-street footfall declining and millions of us turning the online shopping instead, Debenhams has already issued three profit warnings this year. As a result, the company has been cutting jobs, and embarked on a recovery strategy to try to turn things around. Part of the latter is to get more big-name outlets in store, like Nando’s and Costa, and that has apparently been successful in trials so far.

But a full recovery, if it’s achievable, could take some time and cost-cutting seems key to survival right now.

Getting KPMG in on the act doesn’t necessarily mean the company is considering liquidation, but a company voluntary arrangement (CVA) appears to be one of the options under consideration. What that should do is provide a bit of breathing space to try to renegotiate debts, store rents, etc, but it could also lead to the closure of poorly-performing stores.

Debenhams has been a disaster for investors since the company floated in 2006. That timing was unfortunate, just ahead of a decade that saw the financial crisis, followed by Brexit turmoil, and one of the longest periods of pressure on spending for a lifetime.

Price crash

Since that flotation, Debenhams shares have lost almost 95% of their value, trading at a shade under 11p as I write. But, with a recovery strategy in place and KPMG set to offer its help, does this look like an opportunity for those who poo-poo the naysayers to get in and profit from the recovery that might come?

After all, we’re looking at a forward P/E multiple of a mere 4.6 based on current forecasts, with a dividend yield now approaching 6.4%. And, despite the doom and gloom, most of Debenhams’ stores are not loss-making.

But that dividend yield only looks good thanks to the plummeting share price. The 0.7p per share forecast for this year would be slashed from the 3.42p paid in 2017 — which begs the question of why it took so long to stop handing out cash the company couldn’t afford.

And, as my colleague Edward Sheldon pointed out recently, Debenhams is the target of some serious shorting by institutional investors. While I do see a decent chance of Debenhams surviving, it’s not where any of my money would go right now.

The post Debenhams share price crashes, but could it be time to load up? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the 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.

Today, I’m looking at the three most shorted stocks in the UK, according to shorttracker.co.uk. I’m definitely avoiding this trio for now.

Pets At Home

Pet care business Pets At Home (LSE: PETS) is currently the most shorted stock, with 13.2% short interest. Despite the fact the stock has fallen from over 300p in late 2015, to just 121p today, hedge funds are clearly still quite bearish on the £593m market-cap stock. So what’s wrong with the company?

One key issue with PETS is that over the last year the group has been forced to cut its prices, which has lowered margins and profits. For the year ending 29 March, total gross margin fell to 51.7%, from 54.2% the year before, with underlying basic earnings per share plummeting 11.2% to 13.5p. Looking ahead, analysts expect a further decline in earnings this year.

Trading on a forward P/E of 9 and offering a dividend yield of 6.2%, its shares look cheap, but I’m not willing to bet against the hedge funds right now.

Restaurant Group

The second-most shorted company in the UK, with a 12.4% short interest, is Restaurant Group (LSE: RTN), which owns over 500 restaurants including the brands Frankie & Benny’s, Chiquito and Coast to Coast. Like PETS, the stock has endured an awful run, falling from near 700p at the start of 2016, to just 267p today.

With Brexit uncertainty and the extreme weather we experienced earlier in the year, trading conditions for this hospitality group have been challenging. For example, for the 20 weeks to 20 May, like-for-like sales declined 4.3%, and total sales fell 3.1%. Analysts expect earnings per share to fall by around 5.4% for the full year.

The stock currently trades on a forward P/E of 12.7 and offers a prospective yield of 5.9%, but I’m not tempted by these metrics given the large short interest.

Debenhams

Lastly, with 11.9% short interest, we have Debenhams (LSE: DEB), which I’ve warned investors about before. Over the last five years, Debenhams shares have lost nearly 90% of their value, falling from 107p, to 13.5p today. Yet hedge funds continue to short the stock relentlessly which is not a good sign. Could the department store go the same way as House of Fraser?

Debenhams’ recent performance has been concerning. In June, the group released a profit warning advising investors that pre-tax profit for the year is expected to be between £35m to £40m, a long way short of the £50.3m consensus estimate at the time. Ratings agency Moody’s has recently downgraded the group’s credit rating as a result.

Debenhams shares currently trade on a forward P/E of just 5.3 and offer a prospective yield of 6.6%. However, I’ll be steering well clear.

The post 3 dividend stocks yielding 6% I am definitely avoiding for now appeared first on The Motley Fool UK.

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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.