Professional short sellers are currently circling a small group of UK consuming-facing stocks with the goal of profiting from falls in their share prices, potentially caused by Rachel Reeves’ Budget decisions.

The UK outlook is getting worse by the day, with business and consumer sentiment weakening amid concerns the new government doesn’t have an effective plan to accelerate economic growth.

The outlook is further clouded by companies facing higher employment-related costs from April, as these are likely to passed onto the customer via price hikes, leading to higher inflation and reduced consumer spending which would spell disaster for many UK companies.

The statistics make for grim reading: GfK’s monthly consumer confidence index decreased in January, with steep falls in consumer views on the UK economy both looking back a year and 12 months ahead.

HOW DOES SHORTING WORK?

The process involves borrowing shares from someone else, typically an institutional investor, and selling them on the open market. If the shares decline in value, the short seller buys more stock at the lower price to give back to the original lender and pockets the difference. In a nutshell, a short seller will profit if the share price falls.

WHY SHORT STOCKS?

There are multiple catalysts to pull down a share price, which is exactly what short sellers want to happen:

• Short sellers might feel a stock’s valuation is too rich and investors’ appetite could weaken, something which can lead to a de-rating as investors are no longer prepared to pay as much as before to own the shares.
• Market sentiment could weaken and weigh on a company’s share price or its sector.
• Short sellers might believe earnings forecasts will be downgraded, negatively impacting the share price.

The British Chambers of Commerce in January found business confidence had slipped to its lowest level since the aftermath of the mini-Budget in Autumn 2022.

On 6 February, the Bank of England halved its 2025 UK economic growth forecast to 0.75% and predicted inflation would hit 3.7% this year.

Put all these things together and it’s a recipe for disaster if you’re a retailer or leisure operator dependent on consumer spending, so it’s no wonder short sellers are sharpening their knives and hoping to make a pretty penny.

Short selling is high risk and is not suitable for most investors as you can lose more than you initially bet.

FIVE CONSUMER-FACING STOCKS TARGETED BY SHORT SELLERS:

KINGFISHER (KGF)

The DIY sector is suffering from a post-Covid hangover. During the pandemic, many people were stuck at home and decided they wanted to do up their house or flat, so the RMI (repair, maintenance and improvement) market boomed creating a major earnings tailwind for B&Q-owner Kingfisher.

As the pandemic waned and people returned to the office, DIY appetite dwindled and so did the pace of work for tradesmen.

Kingfisher wasn’t doing particularly well ahead of the pandemic and it is still in turnaround mode now.

A warning from the company in November revealed that uncertainties around budgets from new governments in the UK and France had had a negative impact on demand for its products and services.

Layer on top of this the prospect of higher employment-related costs, an even more cautious consumer and fierce competition and it’s easy to see why traders and hedge funds might choose to short the stock.

The risk to the short trade is DIY and RMI activity holds up – just Kingfisher confirming that’s the case could be enough to trigger a relief rally.

It would also position Kingfisher for a ‘short squeeze’, which is when short sellers decide to cover their short positions or are forced to do so via margins calls.

They effectively buy stock as it rises, which in turn can push the price even higher. It’s worth noting that recent trading updates from fellow DIY retailer Wickes (WIX) and tile specialist Topps Tiles [TPT] were both remarkably upbeat.

AKO Capital is among the investors shorting Kingfisher. It favours high quality companies, so when it shorts something one can only presume it doesn’t have much faith in the resilience of the business.

DOMINO’S PIZZA (DOM)

The amount of stock on loan at Domino’s Pizza hit its highest level since 2021 last month, with six different professional investors betting the fast-food company’s shares are going to fall.

The London-listed firm owns the UK and Ireland Domino’s master franchise and has been through a difficult period after it got into a dispute with franchisees over profit-sharing and expansion plans.

Last December, the company announced a new five-year framework deal with franchise partners, which looks to have helped repair relationships but raises costs for the listed entity.

The franchisees themselves are facing higher wage costs associated with the Budget, while consumers’ appetite and ability to afford a £10 to £20 pizza is also under question if the economy remains sluggish.

Domino’s products are a tasty treat, but opting for a cheap supermarket version is an easy decision to make if money is tight.

There has already been a big push by Domino’s on value deals as consumers watch their spending, so continuing down that road implies further pressure on profit margins for franchisees.

Domino’s Pizza takes a fee from franchisees based on revenue rather than profit, which essentially means franchisees’ extra costs are not its problem, although it’s not in Domino’s interest for franchisees to struggle.

Among the institutions shorting Domino’s is hedge fund Marshall Wace, which is betting against a raft of consumer-facing companies including Sainsbury’s (SBRY), Marks & Spencer (MKS), Primark-owner Associated British Foods (ABF), Next (NXT) and EasyJet (EZJ).

These are big names which rely on the general public to keep their tills ringing. If times get harder for such big brands, it won’t simply be bad for the share price, it will also represent a big setback for the UK’s economic growth story.

Vistry (VTY)

A company delivering bad news is naturally a target for short-sellers and Vistry certainly ticks the boxes.

In December, the housebuilder issued its third profit warning in as many months, taking the shares to a two-year low, due to development delays and understated costs, suggesting management took their eye off the ball.

The fact short positions in the stock subsequently increased after three profit warnings imply some investors think more bad news is coming.

The Bank of England’s interest rate cut on 6 February should make mortgages cheaper, and it gave a small boost to Vistry’s share price on the day.

However, an expected increase in job cuts by businesses across the UK linked to higher employment costs could worsen consumer confidence, and many people looking to move home might think they’re better off sitting tight for now, particularly if they are worried about job security.

US hedge fund Citadel Advisors – the investment vehicle for Wall Street billionaire Ken Griffin – is among the investors shorting the stock.

PETS AT HOME

Pets at Home was heavily shorted in the two years preceding the Covid pandemic, but its shares then rallied (and short interest dwindled) as the nation filled their homes with furry friends to keep them company.

Lockdowns led to a surge in dog ownership in particular, benefiting Pets at Home’s retail and veterinary earnings.

Like many Covid winners, demand has since eased and 2024 was filled with negative news flow from Pets at Home including warnings about higher costs and a subdued retail pet market.

A probe by the competition watchdog into the UK vet services market also weighed on investor sentiment.

Furthermore, competition has become a worry as private equity-backed Jollyes is eating everyone else’s lunch by cutting prices and opening new stores as it tries to boost its market share.

Short interest in Pets at Home has been rising slowly since 2023 and continues to do so this year as sellers bet that Pets at Home will struggle in a tough retail market and that the idea pet owners will do anything for their furry friends is no longer true.

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