Metro Bank, Royal Mail and Cineworld are among the UK’s most shorted stocks, new analysis has revealed, as financial uncertainty amid the coronavirus crisis continues to weigh on industry heavy-weights.
How does short selling work?
Short sellers place bets on stocks that they expect to fall in price. Investors pay a fee to borrow shares in a company and then sell them with the aim of buying them back and then returning them to the lender.
Short sellers are betting that the stock they sell will drop in price, meaning they can quickly rebuy them and return them to the lender and pocket the profit.
Companies in precarious situations, or companies suspected of having a bloated valuation, tend to be shorted more than others. Short sellers often bet against high-quality stocks that they believe have risen too far, too fast, and underperforming stocks that they believe may have critical underlying problems.
US-listed Tesla is currently the most short stock in the world, with short interest against the company setting a record $20bn earlier this month. Short sellers claim to see a disconnect between Tesla’s sky-rocketing market performance and its underlying business performance.
What about the UK?
The number of net short positions reported to the Financial Conduct Authority (FCA) in the first five months of this year hiked around 25 per cent compared to the same period last year, as investors sought to cash in on market volatility brought about by the pandemic.
Royal Mail came in close third in the list of the most-shorted UK stocks in July, with 9.4 per cent of the firm’s stock shorted against it by eight different funds.Top 10 Most Shorted UK Stocks
Company Percentage of
stock held short Number of funds
shorting the stock
Hammerson 13.1% 9
Metro Bank 9.6% 4
Royal Mail 9.4% 8
Premier Oil 8.7% 3
Tullow Oil 8.4% 6
Cineworld 7.5% 8
Carillion 7.2% 6
Pearson 6.6% 6
Domino’s 5.5% 7
Petrofac 5.4% 5
Source: Granite Shares
The postal specialist has been hugely affected by business closures and the acceleration of the switch to digital amid the pandemic, with 788m fewer letters sent during lockdown, marking a 33 per cent fall.
Royal Mail last month said it was cutting 2,000 management jobs in an attempt to shore up more than £130m from cost-cuts over the next year.
Growth in the firm’s parcel business failed to offset the collapse in letter volumes which has been exacerbated by the pandemic, with profit before tax plunging 25 per cent to £180m in the financial year to the end of March.
What Granite Shares said
Will Rhind, founder and chief executive of Granite Shares, said: “This year’s huge market volatility — fuelled by tensions in the Gulf, the global coronavirus pandemic and the related economic fallout — has led to opportunities to take short positions.
“In this environment, companies facing difficulties, like Hammerson and Metro Bank, have seen their share price under particular pressure.”
Rhind added: “With the markets as they are today, many professional and sophisticated investors see the ability to use leverage to either go long or short on individual stocks as invaluable… Looking ahead, various factors, whether it be US-China relations, the looming US presidential election or UK-EU negotiations, suggest that markets might continue to see heightened levels of volatility over the coming months.”