- Kingfisher, Domino’s Pizza, Vistry and Pets at Home among UK stocks being shorted
- Short sellers are targeting consumer-facing companies amid a gloomy outlook for the economy
- Rachel Reeves’ Budget decisions have clouded the outlook for consumer spending
- How short-selling works and what investors look for
“Short sellers are circling a group of UK consumer-facing stocks with the goal of profiting from falling share prices, potentially caused by Rachel Reeves’ Budget decisions,” says Dan Coatsworth, investment analyst at AJ Bell.
“The UK outlook is getting worse by the day. Business and consumer sentiment is already weakening amid concerns that 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 be passed onto the customer via price hikes. That could lead to higher inflation and reduced consumer spending – a disaster for many companies on the UK stock market.
“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. The British Chambers of Commerce in January found that 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 that inflation will hit 3.7% this year.
“Put these things together in a pot and it’s a recipe for disaster if you’re a retailer or leisure operator dependent on consumer spending. It’s no wonder that short sellers are sharpening their knives and hoping to make a pretty penny.”
How does shorting work?
“The process involves borrowing shares from someone else 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 then pockets the difference.
“In a nutshell, a short seller will profit if the share price falls.”
Why do certain investors short a stock?
“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 that can lead to a de-rating in a stock as investors don’t want 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 and that will drag down the share price.”
Four consumer-facing stocks being targeted by short sellers
- Kingfisher
“The DIY sector is suffering from a post-Covid hangover. During the pandemic a lot of people were stuck at home and decided they wanted to do up their house or flat, 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 a negative impact on demand for its products and services. Layer on top the prospect of higher employment-related costs, an even more cautious consumer and fierce competition, and it’s easy to see why an investor might choose to short the stock.
“The risk to the short trade is that trading holds up – Kingfisher confirming that’s the case might 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 margin 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 and tile specialist Topps Tiles 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 (UK & Ireland)
“The amount of stock on loan for Domino’s Pizza last month hit its highest level since 2021, with six different institutional investors betting the fast-food company’s shares are going to fall.
“The London-listed stock owns the UK and Ireland 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, Domino’s announced a new five-year framework deal with franchise partners, which looks to have helped repair relationships but raises costs for the listed company.
“The franchisees are facing higher wage costs associated with the Budget. 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, not profit, which essentially means franchisees’ extra costs are not its problem. However, it’s not in Domino’s interest for franchisees to struggle.
“Among the institutions shorting Domino’s is hedge fund Marshall Wace, which is also betting against other consumer-facing companies including Sainsbury’s, Marks & Spencer, Primark-owner Associated British Foods, Next and EasyJet. 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
“A company delivering bad news is naturally a target for short-sellers and Vistry ticks the right boxes. In December the housebuilder issued its third profit warning in as many months, taking the shares to a two-year low. It has been hit by development delays and understated costs. That suggests management took their eyes off the ball.
“The fact short positions in the stock subsequently increased after three profit warnings implies that certain investors think more bad news is coming.
“The Bank of England’s interest rate cut on 6 February should make mortgages cheaper and gave a small boost to Vistry’s share price on the day. Yet 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 higher (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 and that benefited Pets at Home’s retail and veterinary earnings.
“Like many Covid winners, demand has since eased back and 2024 was filled with negative news flow from Pets at Home. It warned 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. It has been cutting prices and opening new stores as it tries to boost its market share.
“Short interest in Pets at Home has been slowly rising since 2023 and continues to do so this year. Short sellers are no doubt betting 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.”
