In an article back in December, I named 10 stocks I’d avoid for 2020. We’ve seen considerable turmoil in markets and the wider world in recent months. As such, the valuations of many companies have changed significantly since the start of the year. In view of this, have any of my stocks to avoid moved to my best shares to buy list?
From avoid to best shares to buy?
Over the years, I’ve found it advisable to steer clear of the market’s most heavily ‘shorted’ stocks. Short-sellers — many of which are well-resourced and research-strong hedge funds — make a profit from a falling share price. Occasionally, they get a call spectacularly wrong. However overall, I’ve found blanket avoidance of the most heavily shorted stocks to be a simple way of dodging many of the market’s complete capital wipeouts, like Carillion, Debenhams and Thomas Cook.
The table below shows the UK’s 10 most heavily shorted stocks at the time of my article in December. I’ve added the latest short positions in these stocks, and the performance of their shares since December.
|
 |
Short positions (%) at 4/12/19 |
Short positions (%) at 9/6/20 |
Share price gain/(loss) (%) |
|
Cineworld |
11.5 |
2.7 |
(55) |
|
John Wood Group |
9.2 |
3.4 |
(27) |
|
Flutter Entertainment |
9.1 |
<0.5 |
24 |
|
IQE |
8.8 |
4.8 |
(10) |
|
Pets At Home |
7.8 |
4.8 |
0 |
|
Metro Bank |
7.7 |
5.9 |
(38) |
|
Babcock International |
7.5 |
6.5 |
(27) |
|
Arrow Global |
7.3 |
1.3 |
(52) |
|
Weir Group |
7.1 |
3.3 |
(22) |
|
AA |
6.9 |
2.7 |
(29) |
The average loss on the 10 stocks is 24%. This is double the 12% drop of the FTSE 100. However, it’s notable all the stocks are showing a reduction in short positions since December. Some of them sizeable. It appears many short-sellers have taken profits during the market crash.
4 I’m still avoiding
Only Metro Bank and defence outsourcer Babcock International remain in the top 10 shorted stocks today. I’ve long been sceptical about Metro Bank’s business model, and concerned by criticisms of Babcock’s opaque accounting. With both stocks still on the top 10 shorts list, I’m happy to continue to avoid them today.
Despite dropping out of the top 10, I’m also continuing to avoid cinema chain Cineworld and high-tech wafer maker IQE. This is because I see issues with accounting and management. Recent news flow from the two companies hasn’t changed my view.
4 I’m now watching
After significant falls in both share prices and short positions, four of the 10 stocks are now on my watch list. These are energy services firm John Wood Group, specialist debt investor Arrow Global, engineer Weir Group, and the AA.
2 make my best shares to buy list
Pet products and vets chain Pets at Home, and sports betting and gaming group Flutter Entertainment, are now among my best shares to buy.
At one time, Pets’ business was struggling, and there was a lack of transparency about loans to its vet joint ventures. However, I believe new management has resolved both. In March, I warmed to the stock, suggesting this revitalised market-leading UK business has excellent long-term growth prospects. Last month’s annual results reinforce my positive view.
Paddy Power and Betfair owner Flutter Entertainment came under pressure from short-sellers after it announced an all-share combination with Canadian outfit The Stars Group last year. However, after recently reporting improving momentum in the enlarged business, short interest appears to have evaporated. I like the industry for its cash-generative and defensive qualities. And I reckon Flutter has enhanced its position through consolidation. I now rate it a ‘buy’.