I know what you’re thinking. How can you possibly measure how ‘hated’ a stock is, without surveying every investor in the country? Well, it’s not that difficult actually, as investors tend to vote with their money. And right now there are fund managers out there ‘betting’ millions of pounds that the share price of Carillion (LSE: CLLN) will sink further. I’m talking about the dark art of short selling.
Spooky
For those of you unfamiliar with the practice, short selling is when investors ‘borrow’ shares from a broker, then proceed to sell them on the market in the hope of seeing the price drop. If all goes to plan, they buy the shares back at a lower price, return the shares, and pocket the difference. Although the practice is perfectly legal and legitimate, there are some who believe it to be unethical, myself included. But that’s another topic altogether.
The short sellers were spot on earlier this year, when by 9 July more than a quarter of Carillion’s shares were ominously being shorted. A shock profit warning the very next day, accompanied by the news that net debt would be higher than expected, led to the departure of the CEO, and a suspension of the dividend. Sounds spooky, but the short selling activity had been building up for months, and coincidentally reached a climax the day before the trading announcement on 10 July.
Relegated
Investors were less than impressed with the news, and the shares migrated south on a truly epic scale, falling below the £1 mark for the first time since the start of century, then further still to 42p, easily an all-time low. To make matters worse, the once-mighty Carillion suffered the indignity of being relegated from the FTSE 250 at the next index reshuffle two months later.
It seems that shareholders would have done well to take heed from the short sellers on this occasion. But I must stress that they don’t always get it right. Since then, there’s been no shortage of news flow around the company, with a whole raft of management changes, and financial advisors being called in to help sort out the mess. And yet the horror show has continued, with another profit warning just a couple of weeks ago, along with the announcement that the company is likely to breach its financial covenants. Crikey!
Safety first
For the unfortunate few that have still held on to their shares, I will at least provide a glimmer of hope. Despite its predicament, Carillion has been successful in winning a raft of new contracts in recent months, and some analysts believe the group is simply too big to fail, with some form of government intervention possibly even be on the cards. This may give loyal shareholders a reason to regain some optimism, especially with the shares trading at a bargain basement price-to-earnings ratio of just one.
But such a low multiple often comes with a health warning (or perhaps I should say a wealth warning), and with almost a fifth of Carillion’s stock still being shorted, I’d be inclined to say that new investors should stay well clear. As always with construction firms, it’s safety first.