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Breaking-Finance.Com - Market conditions have stabilised this year but Wirecard's implosion shows that short-selling is still a viable and profitable strategy
Breaking-Finance.Com - The spectacular demise of German tech company Wirecard (WDI) has made staggering sums of money for short sellers, underlying how lucrative the investment strategy of betting against a company can be. Wirecard has now filed for insolvency and key executives have been arrested as regulators probe the possibility of large-scale fraud. But Wirecard has been on the radar of short-sellers, who have long suspected financial malpractice at the company, for years now. Indeed, Germany’s financial regulator BaFin banned shortselling in Wirecard for two months in 2019 to stabilise the firm’s share price, which at the time was around €150. While an extreme case, Wirecard’s problems are an example of how companies can blow up in this year’s volatile market conditions, which have put a huge strain on firms in sectors like travel, retail and leisure. European regulators put a temporary ban on shortselling certain EU companies during the worst of the March sell-off, but that has since been lifted as volatility has eased. Closer to home, a number of companies have gone into administration, including Britain’s largest shopping centre Intu, whose collapse proved a lucrative bet for asset manager BlackRock and hedge fund Marshall Wace. Here, we update our regular look at which are the most shorted stocks on the FTSE. The Most Shorted Stocks on the FTSE Last time we looked at the FTSE’s most shorted companies in mid-March, Premier Oil (PMO) was top of the list, with nearly 20% of its shares being shorted. Since then the percentage of its stock being shorted has dropped to 8.69%, indicating that investors are feeling more optimistic now the oil price has started to recover. Instead it is commercial property firms such as Hammerson (HMSO) that are in the short-sellers’ cross hairs. There are major concerns about the sector, particularly after the collapse of Intu, which owns major shopping malls across the country such as Manchester’s Trafford Centre. Hammerson’s shares have plunged 78% since the start of the year, and the percentage of its shares being shorted has risen from 8.3% in March to almost 14% at the end of July. Royal Mail’s (RMG) shares have also been under pressure in 2020, and the postal operator has recently announced that investors will receive no dividends this financial year.
Not all the companies in the top 10 list have had a bad year, though. Supermarket Sainsbury’s (SBRY) and Domino’s Pizza (DOM), whose shares are up 32% this year, have been among those businesses which have benefited from this year’s lockdown shopping trends. Sainbury’s received a sales boost from panic buying at the start of lockdown, but shares have been under pressure since its mega-merger with Asda was blocked by the regulator last year. Competition from budget rivals Aldi and Lidl remains, while low inflation keeps a lid on prices. Domino’s has seven short sellers on the FCA register, who are betting that changes to eating habits during lockdown – with people trying rivals such as Just Eat for the first time – mean that pizza isn’t the default takeaway option any more. (We wrote about food delivery in our series on disruption).
With stock market volatility levels still higher than normal, there are bound to be plenty of shorting opportunities for the remainder of this year; it’s no coincidence that some of the most heavily shorted companies, such as Cineworld (CINE) (down 80% this year) have suffered steep drops in share prices. In fairness to companies like Cineworld, they have been at the mercy of external events - cinemas have just re-opened in the UK and are some of the last consumer-facing companies to have government restictions lifted.
On the flipside, bombed-out sectors such as retail, oil, and travel can attract professionals who are keen to capture any of the recovery on the upside. Some cruise shares, for example, are off 75% this year. But the hard part for the short seller is picking the companies that won’t survive this crisis year rather than the ones that will put 2020 behind them as travel gets back to normal and a coronavirus vaccine is found.
What is Short-Selling?
Short-selling can be a highly profitable way to exploit the falling share price of companies in distress. Instead of buying shares and hoping their value rises, you take a reverse position whereby you profit if the shares fall.
The Financial Conduct Authority started publishing a daily list of short positions in the aftermath of the financial crisis, detailing which companies are being shorted – and which investment firms are doing the shorting. Even during the depths of the March sell-off this year, the FCA didn’t ban short-selling UK companies, arguing that the activity has a useful market function.
“Our focus is on maintaining open markets that operate with integrity and we note that an ability to short sell can contribute to this, including by supporting effective price formation, enhancing liquidity and enabling risk management,” the FCA said in March.
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