Short sellers lowered their bets against online retailers in June after fashion companies spent months among the UK’s most shorted companies.
The practise of short selling involves firms buying shares in a company they expect to fail, loaning them to other investors and then buying them back when the price tanks, earning them a profit.
Online retailer ASOS has been among the most shorted UK companies since Trustnet began this monthly series in May last year, topping the list in November after short positions reached 8.8%.
That gradually shrunk to 4.6% by the end of May, but the rapid sell-off by five shorting firms in June dragged it down an additional 3.4 percentage points to 1.2%.
It exited its long-held spot on the top 10 list after this steep decline, leaving Squarepoint as the only remaining firm with a short position in the company.
Source: Financial Conduct Authority
In the most recent trading announcement released in June, ASOS revealed a 14% drop in revenue over the past three months compared to the same period last year, yet markets reacted positively to the news.
That is because the company is delivering on its promise to prioritise profitability over growth, according to Aarin Chiekrie, equity analyst at Hargreaves Lansdown.
Although revenues were down, profit per order was up more than 30% since the start of the year, which ASOS chief executive José Antonio Ramos Calamonte said was evidence that his “plan to turn the business around” was working.
Chiekrie said the company’s efforts to strip away unprofitable assets should “provide long-lasting relief to the headwinds that have inflated the group’s cost base”.
Shares in ASOS leapt 11.9% in June, yet it is still down 57.4% over the past year, leaving some way to go before a full recovery.
Share price of ASOS in June and over the past year
Source: FE Analytics
Nevertheless, Chiekrie pointed out that the company still needs to overcome the issue of its “disproportionately large” stockpile of inventory.
It ended its most recent financial year with £1.1bn in inventory – more than twice the amount it had at the end of 2020 when the pandemic caused online retailing to boom.
Chiekrie said: “There’s still work to be done on this front, but getting this excess stock off the books will provide some tailwinds to margins moving forwards.”
Indeed, Chris Beauchamp, chief market analyst at IG Group, said that investors shouldn’t be so quick to leap back into ASOS on the back of June’s good news.
It was the sixth most bought stock on interactive investor last month, but debt issues could see it returning to the most shorted list if they remain unresolved.
Net debt increased by £560m in the two years leading up to its 2022 annual report, which could be challenging for the £448m company to pay off, notwithstanding its fundraising efforts.
Beauchamp said: “It’s no surprise to see ASOS shares surging given the rosy outlook, but this is more short-covering than anything else.
“The balance of risks for investors was certainly skewed to the upside, but ASOS has a long way to go to regain market confidence. Predicting a better performance in coming quarters is one thing, delivering quite another.”
Even so, positive moves in June were enough to convince Frasers Group (formerly Sports Direct) to up its stakes in ASOS by almost 9% last month.
It also became more bullish on other British online fashion retailers such as Boohoo, which it bought a 5% position in throughout June.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “It’s clear the company still sees value to be gained through investments in the electricals market and the online fashion space.
“As lives of younger generations are increasingly spent online, through entertainment and shopping habits, Frasers Group sees upping stakes in these companies as providing channels into those markets.”
Boohoo was another of the UK’s most shorted companies to have bets against it drop in June, although it remains on the list in the fifth spot.
Short positions in the company reached as high as 9.6% when it topped the list in October, but that shrank 1.3 percentage points in June alone, bringing the current total to 3.7%.
Shares in the fashion retailer dropped 10.8% over the course of the month – adding to its 38.3% fall over the past year – yet short sellers continued to exit their positions.
Share price of Boohoo in June and over the past year
Source: FE Analytics
Three shorting firms dropped their bets on Boohoo over the period as improving sentiment paints a rosier picture for fashion retailers in the UK.
Ben Laidler, global markets strategist at eToro, said: “Retail investors backing British fashion retailers over the last few years, there hasn’t been too much to celebrate. The industry enjoyed a Covid lockdown spending spike and share price surge but has been suffering from a cost-of-living spending hangover since then.
“While it hasn’t been a pretty picture for the UK fashion sector in the last five years, we are seeing early signs of a share price recovery in 2023, with sentiment starting to improve as inflation and interest rates in the UK reach a peak.”
ASOS and the only other company to leave the top 10 list in June – cruise line Carnival – were replaced by two energy companies.
Petrofac re-joined the list after a month break, with short positions rising 0.6 percentage points to 3.6% over the 30-day period.
Likewise, bets against Tullow Oil rose from 2% at the start of June to 3.4% by the end of the month, lifting it among the UK’s 10 most shorted stocks.