- AJ Bell analysis finds more than a third of the UK’s 20 most shorted stocks are exposed to the housing market
- Housebuilders and building materials groups gained an average 12.2% on the day of Andy Burnham’s first-time buyer announcement
- Shares in Ibstock jumped 23.5%, while Taylor Wimpey, Crest Nicholson, Vistry and Genuit all rose by double digits
- The rally shows how heavily shorted stocks can rebound sharply when investor sentiment changes
- Questions remain over whether higher interest rates and affordability pressures will continue to weigh on the sector
- Short sellers also caught out by Greggs’ latest update
- How shorting works and the list of most shorted UK stocks
Dan Coatsworth, head of markets at AJ Bell, comments:
“Short sellers have been caught out by the government’s ‘Your First Home’ help to buy scheme this week. Seven out of the top 20 most shorted stocks on the UK market are housebuilders or building materials suppliers. These names saw a 12.2% average share price increase on the day of Andy Burnham’s announcement (28 September).
“Highly shorted stocks can sometimes rise sharply following positive news as short sellers rush to close positions, creating additional buying demand.
“Sentiment has deteriorated towards the property sector as a high oil price fuels inflation fears and has triggered expectations for a series of interest rate hikes, which makes mortgages more expensive and prices many people out of the market. That has made the property sector an easy target for short sellers who profit when a share price falls and lose out when a share price rises.
“Just as it looked like they were enjoying an easy ticket to riches, property-related stocks jumped on Monday when Andy Burnham announced new measures to get more people on the housing ladder.
“That triggered a broad rally, including decent gains for the likes of brick maker Ibstock and housebuilders Vistry, Crest Nicholson and Taylor Wimpey, all of whom feature among the most shorted stocks. The list also features Genuit, which supplies sustainable plastic piping for new-build residential housing, aggregates group Breedon, and trade-to-DIY specialist Kingfisher, which also moved for similar reasons.”
“The rally suggests investors believe the measures could support demand for new homes and improve the outlook for housebuilders and parts of the construction supply chain. More details are still required to fully understand the scheme, but in principle it provides investors with a reason to reappraise the sector.
“The core issue of interest rates potentially being higher for longer hasn’t gone away though. Affordability remains a problem and that keeps a headwind in place for the sector. Therefore, short sellers might view this week’s share price bounce as only being temporary, unless oil prices come down a lot and interest rate hike expectations are pared back.
“Ultimately, the government’s housing initiative has handed short sellers an uncomfortable reminder that heavily shorted sectors can rebound sharply when sentiment changes. The key question now is whether improved housing demand expectations prove durable enough to overcome concerns about higher borrowing costs.”
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 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.
“Short sellers borrow shares before selling them. As a result, stock lending data can provide a useful indication of short-selling activity, although not every borrowed share is necessarily being used for a short position.”
Which stocks are short sellers betting against?
“Outsourcing group Capita and WH Smith are in the top five most shorted stocks on the UK market. The elevated short interest suggests some investors remain sceptical about their recovery prospects following bad news.
“Capita is no stranger to controversy and has recently been subject to intense scrutiny over failures involving a civil service pension contract. WH Smith has suffered accounting issues and a slowdown in North America which was meant to be its important growth region.
“Wizz Air is also attracting more short interest, perhaps as parties bet against the airline amid a higher oil price which pushes up costs and threatens to dampen travel demand.
“Greggs remains one of the most shorted stocks, and short sellers will have been caught out by a positive trading update on 30 September that triggered a new rally in the stock. Greggs is fighting back after a sluggish period and an improvement in sales growth could prompt short sellers to rethink their positioning.”
Who are the short sellers?
“Recent rule changes make it harder to identify short sellers. Under the old rules, investors who were betting against a company had to tell the Financial Conduct Authority (FCA) once their short position reached 0.2% of the company's shares. If the position grew to 0.5% or more, the FCA made both the size of the bet and the name of the short seller public. That has now changed.
“Short sellers still need to report positions of 0.2% or more to the FCA, but the regulator no longer identifies individual investors. Instead, it publishes a single Aggregate Net Short Position (ANSP) figure showing the combined size of reported short positions in a company.
“Investors can still see how heavily a stock is being shorted, but they can no longer see exactly who is placing those bets. Historically, hedge funds have been among the most active short sellers, with certain asset management firms also getting involved.”
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.”
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.”