You might not think online grocery retailer Ocado (OCDO), luxury goods group Burberry (BRBY) and UK water utility giant Pennon (PNN) have much in common. However, they are all among the most shorted stocks according to data from the FCA (Financial Conduct Authority) daily short position report which you can find on the published on the ShortTracker website.

WHAT IS SHORT SELLING?

Short selling also known as shorting or going short is a trading strategy which involves an investor speculating that a stock will go down in value with the aim of profiting from such a move.

Short selling can be applied to other financial markets including foreign exchange, commodities, and indices and is typically conducted by hedge funds but not exclusively.

For example, VT Argonaut Absolute Return (B7FT1K7), steered by Barry Norris, takes both ‘long’ and ‘short’ positions.

To execute a short you borrow shares with the aim of selling them and then buying them back later at a lower price.

Short selling positions above 0.2% of a listed company’s issued share capital must be disclosed to the FCA.

WHY ARE THESE STOCKS BEING SHORTED?

It is no surprise that stocks like Ocado, Burberry and Pennon have attracted the attention of short sellers thanks to their past performance.

Bad news has engulfed Burberry. The mono-brand fashion firm has suffered due to a slump in demand for luxury goods globally.

The recovery in the Chinese market hasn’t materialised (so far) this year and the company has suspended dividends, issued profit warnings, and replaced its chief executive Jonathan Akeroyd with former Coach, Jimmy Choo, and Michael Kors head Joshua Schulman to steady the metaphorical ship.

Short sellers have piled in as shares continue to trade at 10-year lows. Over the past year the shares are down 69%. There are four institutions with disclosed short positions and 5.4% of the issued share capital was being shorted as of 28 August.

Burberry has also been relegated from the FTSE 100 (recently) after 15 years, a fate which befell fellow shorting target Ocado in June 2024.

SHORT SELLERS ON OCADO’S BACK

Despite some recent good news from the online grocery retailer concerning delivery hub expansion in Australia and Japan, five institutions are short selling Ocado.

Once a stock market darling, it has had a dramatic fall from grace. In June the company crashed out of the FTSE 100 after its valuation fell from £22 billion (at the height of the pandemic) to £3.1 billion.  

There have been rumblings about the company’s tie-up with Marks & Spencer (MKS) in the UK and about its ability to close new deals with global supermarkets – which was seen as the big growth engine for the group.

There are five individual short positions in Pennon accounting for 4.4% of the company’s shares.

In 2023, Pennon along with other water firms were under investigation from Ofwat over the dumping of raw sewage.

Southwest Water – owned by Pennon – was fined £2.1 million by the UK Environment Agency for pollution offences across Devon and Cornwall spanning a period of four years.

Now Pennon and other water utilities are locked in a battle with the regulator over the level of bill increases they will be able to levy on customers.

Management instability hasn’t helped. In July Pennon’s CFO Steve Buck stood down with immediate effect (due to personal reasons) to be replaced by Laura Flowerdew – Pennon’s third CFO in a year.

COULD SHORT SELLERS BE GETTING IT WRONG?

Despite the criticism they attract, short sellers do play an important role. Because a short seller’s losses are potentially unlimited they tend to do their homework and therefore they can help shine a light on problems at a company which other market observers have missed.

That doesn’t mean they always get it right. In Shares view they are off base with Kingfisher (KGF) the home improvement giant behind B&Q and the Screwfix store chains.

In February we added Kingfisher to our Great Ideas portfolio against an improving backdrop.

The UK housing market is in recovery mode after the Bank of England cut interest rates on 1 August and consumer confidence has started to return.

In May, Kingfisher pleased investors by maintaining its full-year outlook even after seeing mixed sales in the three months to the end of April.

Group first-quarter sales hit £3.3 billion, an increase of 0.3% on a constant-currency basis but a dip of 0.9% on a like-for-like basis.

UK sales were up 2.6% on a reported basis and 1.2% on a like-for-like basis at £1.63 billion, with a particularly strong showing from Screwfix which saw a 6.3% increase in reported revenue thanks to new store openings on top of underlying growth.

DISCLAIMER: The author of this article (Sabuhi Gard) owns shares in Ocado.

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