High street retailers and restaurants are being targeted by short sellers, with almost a third of the total positions on the stock market in the consumer sector, research has found.
The businesses have also been on the end of a 66 per cent rise in the number of short positions over the past three years, while 38 per cent of the top 50 shorted companies last year were consumer companies.
The findings from Linklaters, the law firm, underline the pressure on chains as costs rise and customers spend less, and were based on regulatory filings made by companies to the Financial Conduct Authority.
Short-selling, typically by hedge funds, involves paying a fee to borrow a share and then selling it in the hope of buying it back more cheaply at a later date and turning a profit before returning the security to its original owner.
The top ten most shorted companies currently include Debenhams; the Restaurant Group, which owns Frankie & Benny’s and Chiquito; Pets at Home; Marks & Spencer and Greencore, the food producer. WM Morrison; Greene King, the pub retailer and brewer; and Ocado also make up the top 20.
The retail and casual dining industries have come under severe strain. Toys R Us and Maplin, the electronics retailer, collapsed into administration,
New Look agreed a restructuring with its creditors last month and Prezzo, Byron and Jamie’s Italian have shut restaurants. Conviviality, the owner of Bargain Booze and Wine Rack chains, collapsed after management accounting problems and has been forced to sell off its wholesale and retail arms.
Mothercare, Debenhams, Moss Bros and Carpetright have also all issued profit warnings this year.
The strength of the retail industry is seen as a barometer of consumer sentiment and is an important contributor to economic growth.
Retailers are being hurt by cut-throat competition from online and discount businesses as well as increasing costs from the living wage, apprenticeship levy and the fall in the value of the pound since Britain voted to leave the European Union.
The casual dining industry has struggled with oversaturation in the market after a number of chains expanded rapidly, which has been compounded by rising costs.
The research by Linklaters found 31 per cent of short positions between the start of 2015 and the end of 2017 were in the consumer sector, which includes retailers, restaurants and manufacturers of retail goods.
It was significantly higher than real estate, the next closest sector, which accounted for almost 10 per cent and compared with just 2 per cent in energy and utilities and the same percentage in insurance.
Richard Hodgson, restructuring and insolvency partner at Linklaters, said short positions were a proxy for distress and given the problems facing consumer businesses it was unsurprising investors were seeking to profit from falls in share prices by taking short positions. However, he said: “The sheer volume of short position reporting at present is higher than many might have thought.”
Nick Billson 1 day ago
Short-selling by traders and hedge funds is done when there is a reasonable expectation that the company’s share price is likely to fall.
The decision to short-sell is taken after extensive analysis of the company’s accounts and the trading conditions around the company.
When a company is short-sold it is an indication that there are reasons to be cautious about buying the shares in the first place.
Short-selling serves a useful purpose in the market. Judging from some of the comments there seems to be a lot of ignorance around the practice; it should not be banned, it has nothing to do with “deregulation of the market”, companies are not being “preyed on” and short-sellers are not “vultures”.