Institutions and individuals who believe a company’s prospects are poor can – if they have the capacity and clout to do so – borrow its shares, sell them, and hopefully buy them back cheaper. They then return the shares to their owner and pocket the difference.
Short sellers had built up a 10.7% short position in Thomas Cook just before it went bust, and Sirius Minerals was being shorted before its share price slumped. It is worth considering what has earned the following companies a place in the top three most shorted stocks in the FTSE All-Share Index.
Kier Group
Short sellers targeted Carillion before its liquidation, and now have another UK contractor in their sights. Kier (LSE: KIE) currently has 9.8% of its shares sold short, and this September confirmed an earlier profit warning by reporting a yearly loss of 158.5 pence per share. Restructuring charges, loss-making contract recognition, and writing down the assets of Kier’s housebuilding division — the proceeds of which are earmarked for debt reduction — all contributed to the loss.
Kier had to raise funds to plug a gap left by banks exiting a financing initiative — which Carillion also used — where they paid smaller subcontractors quicker but at a discount, and reimbursed later by Kier. Even with the initiative in place, Kier had a history of failing to pay invoices on time.
The company’s order book includes £1.5 billion worth of contracts for the delayed HS2 rail line, and the final dividend has been cancelled. Two board members have gone, and restructuring is planned, but those shorting the stock have little faith in a turnaround.
AA
Despite growing revenues, 9.4% of AA (LSE: AA)’s shares are sold short. Operating profit growth is breaking down due to increased advertising and administrative expenses, which are needed to address a decline in memberships. Some 740,000 members left over the last year, but recruiting new ones may be difficult as the bulk of members don’t buy direct.
Partnering with banks and insurers, who bundle AA’s products with accounts and policies, are where the bulk of memberships come from. But considering the customer churn that insurers face, this year’s partners may not be the ones you want next year. Ill-will is likely lingering among customers who held multiple memberships alongside their personal ones. AA identified the oversight in 2017 and corrected it at a cost of £7 million.
The company has stated that membership numbers have stabilised this year, and will grow in the next, perhaps as it sells more of its own insurance and bundled memberships; The short sellers are not convinced.
Wood Group
The last two years have been loss-making for Wood Group, and earnings had declined over the prior three. The company sold its nuclear business in August this year for £250 million (despite winning a £1 billion contract for decommissioning Sellafield three months before) to pay down debts and refocus on its core business.
The core business is exposed to the oil and gas industry, whose appetite for investment fluctuates with the price of fossil fuels, and although the latest half-year report showed a profit had been made, short-sellers are not folding their bets just yet as the net short position stands at 9%.