- Short sellers out in force as UK market hits new highs
- Fourteen UK stocks have seen a noticeable increase in short interest over past three months
- Primary Health Properties, Ibstock and Whitbread have seen the biggest rise in short interest among this group
- Greggs and Legal & General also attract more short interest, among others
- How short-selling works
Dan Coatsworth, investment analyst at AJ Bell, comments:
“While the FTSE 100 has recently hit a new high, a growing number of bets are being made against a select group of UK stocks. Forget ‘Pomp and Glory’, certain investors hoping for ‘Slump and Glory’.
“AJ Bell has found 14 companies where the amount of stock on loan has shot up in the past few months. This indicates that either more parties are shorting the stocks or existing ‘shorters’ are increasingly confident they will profit from a falling share price.
“The targets include food-on-the-go retailer Greggs, hotels group Whitbread and life insurer Legal & General. The most dramatic increase is seen at real estate group Primary Health Properties and brick maker Ibstock.
“Primary Health Properties has been fighting hard to buy sector peer Assura and short sellers might think it is either overpaying or won’t win the bid battle. Ibstock is bringing more brick production back online as a bet on increased demand from housebuilders. Short sellers might have targeted Ibstock in the belief that extra demand won’t materialise in the near-term.
“There is a phrase that says ‘a rising tide lifts all boats’, suggesting that all UK stocks will rise if the broader market is doing well. If the short sellers are correct then certain stocks are primed to fall back. It suggests that investors need to be careful with new-found euphoria around the UK stock market and think about the downside as well as the upside potential.”
How does shorting work?
“Investors buy a share in the hope that the price goes up and they make a profit when selling out. That’s known as ‘going long’. Short sellers including hedge funds do the opposite. They bet against a company and stand to make money if the share price falls – which is known as ‘going short’.
“Shorting involves borrowing shares from a broker-dealer and selling them on the open market. If the shares decline in value, the short seller buys the same amount of stock, but at the lower price to give back to the original lender and then pockets the difference.
“Because the short sellers need to borrow shares as part of the process, the amount of shares in a business that are on loan is a good way to measure how widely the company is being shorted.”
Why is shorting controversial?
“There is a misperception that short sellers are ‘evil’ and spread lies to pull down a share price, so they financially benefit.
“In reality, many short sellers do in-depth research into a company and they take a short position if they think the valuation looks excessive and could revert to mean, they spot something worrying in the accounts, or they think the business is challenged and could struggle, among other factors.
“Shorting is high-risk and not suitable for most retail investors as you can lose more than you bet. When you go long, the most you can lose is the money you invested. With shorting, there is no limit to the amount you can lose, in theory.”
Three stocks being targeted by short sellers
Primary Health Properties
“The investment trust has been battling private equity group KKR to buy medical centre property owner Assura. The target’s board recommended PHP’s cash and shares bid in June, but the subsequent decline in PHP’s shares is telling.
“PHP has offered 0.3865 new shares and 12.5p in cash, together with a 0.84p special dividend. Shares in PHP are currently trading at 95.40p, meaning the equity component of the offer is worth 36.87p. Add in the other bits and that values Assura at 50.21p per share. KKR’s best and final offer is 50.42p in cash, meaning Assura shareholders would be better off with the private equity group. Acceptance levels for the PHP bid have been minimal to date.
“Short sellers will have been watching this situation closely as Assura’s board seem to be happy to back whoever offers the most amount of money. If PHP loses the bid, its share price could potentially fall back further and that would net the short sellers a profit. After all, Assura would have a new owner with deep pockets to accelerate growth and make life harder for PHP to compete.”
Whitbread
“Whitbread’s shares have rallied since April as investors took the view that a stale UK performance would start to improve. First quarter results in June showed ongoing weakness in the UK arm, yet Whitbread emphasised that it continued to outperform the market.
“Short sellers might have concluded the shares have now gone too far given the news flow doesn’t warrant a premium rating. Whitbread is trading on 15.3 times forward earnings, its highest rating since February 2024.”
Greggs
“Greggs has rolled out all kinds of reasons this year as to why trading has been held back. From dealing with snow to excess heat, investors are growing tired of the excuses. There are growing concerns that Greggs’ recent slowdown might not be a one-off.
“Its investment case was predicated on rapid expansion and the nation maintaining its ferocious appetite for sausage rolls. Now we’ve got a situation where there are Greggs everywhere you go and tastes has evolved, moving away from pastry-based treats to healthier items.
“Greggs’ latest results failed to win over the market and short sellers might be banking on further deterioration in investor sentiment and in the retailer’s share price.”
