When it comes to investing, following the herd instead of doing my own analysis is dangerous. I can end up buying a dud that costs me a fortune. I can also miss a sparkling investment opportunity that the broader market has missed.
That’s not to say that observing the trades of hedge funds and institutional investors is a bad idea, of course. The decisions of these heavyweight operators are backed by bucketloads of experience and considerable financial clout.
I’ve looked at shortracker.co.uk to root out the FTSE 100 shares that have attracted the most amount of short selling from these sorts of investors. Shorting involves borrowing and selling shares one doesn’t own in order to to rebuy them at a lower price later on. This allows the shorter the chance to make a meaty profit.
Here are two of the most-shorted stocks on the FTSE 100 today. Should I give them short shrift or buy them for my Stocks and Shares ISA?
J Sainsbury
As I type, around 3.5% of J Sainsbury (LSE: SBRY) shares are currently shorted, putting it second on the list of most-shorted FTSE 100 stocks.
To me this doesn’t come as a surprise. Worries over supply chains and the prospect of half-empty shelves over the critical Christmas period might be grabbing the headlines today. The biggest threat to J Sainsbury, however, comes from the intensifying competition it faces from discounters Aldi and Lidl, online-only players like Amazon and established operators such as Tesco.
Sainsbury’s has invested huge amounts in its online channel to capitalise on the e-commerce boom and take the fight to its rivals. However, the supermarket has a heck of a fight on its hands to stop losing market share as its competitors steadily expand. The risks here remain considerable.
IAG
Around 3.2% of International Consolidated Airlines Group (LSE: IAG) shares are currently shorted. This puts it third on the list of most-shorted FTSE 100 shares. And I don’t think it’s a surprise why: the fast-spreading Omicron virus has raised the prospect of fresh lockdowns that could batter the aviation industry’s recent recovery.
There’s a lot I like about IAG. I like its leading position in the lucrative transatlantic market. I also like its rising presence in the rapidly-expanding low-cost segment (though a competition probe into its planned acquisition of Air Europa could scupper its plans here). These qualities could help deliver significant earnings growth in the years ahead.
However, it’s also true that IAG faces a number of significant risks. The threat posed by the ongoing Covid-19 crisis isn’t the only danger. I’m also concerned about the prospect of elevated fuel prices as crude prices soar. Then there’s the issue of intense competition that IAG has to find a way to overcome.
IAG had net debt exceeding €12bn as of June. In the long term this could significantly hamper its ability to invest in its operations for future growth. In the short term it could prove catastrophic if IAG has to ground its planes again en masse.
I won’t be buying Sainsbury’s or IAG shares for my ISA today.