Investment houses eased their bets against UK companies in April, lowering their short positions against eight of the country’s most shorted stocks throughout the month.
Short-selling practice involves firms borrowing shares in a company they expect to struggle in the stock market, selling them on the open market and buying them back at a cheaper price once their value falls.
Online grocer Ocado was the most shorted company in the UK for the second month running in April, but short positions in the company dropped one percentage point to 5.6% over the course of the month.
Source: Financial Conduct Authority
It leapt into the top 10 list and straight to the top spot In March after five firms put 3.1% of the company’s shares for their short book.
Sentiment towards Ocado has diminished considerably since investors rallied to buy its shares in the pandemic. It was in high demand as consumers ordered groceries to their homes, with the share price leaping over 77% in 2020, but it has failed to match this popularity since lockdown restrictions lifted.
High inflation dampened its outlook further in 2022, with its 63.2% drop in share price throughout the year making it the worst performing stock in the FTSE 100.
Share price of Ocado vs the FTSE 100 in 2022
-10.png)
Source: FE Analytics
However, its quarterly results released at the end of March were a “ray of light,” according to Chris Beauchamp, chief market analyst at IG Group, which may have aided the easing in short positions.
Some investors were pleased to see a 13.8% rise in active customers and 3.4% increase to retail revenue in the report.
Beauchamp said: “These are the kind of numbers on which a recovery can begin, and if inflation comes down in the year ahead perhaps Ocado’s share price can recover too, reversing the dismal underperformance against the FTSE 100 so far this year.”
This seems to have reassured markets somewhat in April, but Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said that hurdles still lie ahead.
“There are of course challenges to consider, not least that competition is still attempting to gnaw away at market share,” she added.
“A true understanding of Ocado Retail’s attractiveness can’t be painted until inflation subsides and the fog clears.”
However, the biggest reduction of short positions throughout the month came from online retailer ASOS, with firms cutting their bets by 1.2 percentage points throughout the month.
The number of shorted stocks lowered to 4.5% in April, having fallen for five consecutive months from its 8.8% in November last year.
It was promoted to the FTSE 250 index last year, but shares in the company dropped 78.7% throughout 2022 as rocketing inflation quelled consumer spending.
AJ Bell investment director Russ Mould said: “There can be no better reminder of how it is the fundamentals of profits, cash flow and valuation that matter over the long term, not piffle about what index a stock is in or how index entry can spark near-term fund flows from index buyers.”
Sentiment has improved in 2023 with shares in ASOS up 36.5% since the start of the year, but today’s half-year results could sway investors. Mould anticipates a 3% drop in sales to £2bn with revenues remaining even at £4bn.
Share price of ASOS vs FTSE 250 in 2022 and 2023
Source: FE Analytics
Flooring company Victoria was the only new entrant to the top 10 list in April, but its short position of 3.8% has remained at the same level since December last year.
It was bumped onto the list after bets on the Hut Group (THG) dropped sharply from 4% to 1.3% throughout the month, pulling it from the top 10.
The ecommerce retailer received an acquisition bid of £1.2bn from Apollo in April which was followed by a 44.9% jump in its share price.
The only top 10 constituents to have an increase in short positions throughout the month were Kingfisher and Moonpig, which were up 0.7 and 0.6 percentage points respectively.
Home improvement company Kingfisher disappointed shareholders with its annual report in April, revealing a 36.7% drop in profits to £723m.
Demand boomed in 2020 when consumers splashed out on DIY projects as they were locked up at home, but sales have fizzled out since.
The 5.6% of its shares held by shorting companies may be an indicator of poor sentiment but Adam Vettese, analyst at eToro, said Kingfisher’s 4.9% yield might be attractive to income investors.
“One of the bright spots is that despite the sharp fall in earnings, Kingfisher’s dividend cover remains healthy at around 2.4 times adjusted earnings,” he said.
“However, if earnings take another big hit next year as forecast, that dividend could start to look decidedly less robust.”