Yahoo Finance Hedge funds could make millions this week from bets against the High Street
Hedge funds have millions of pounds on the line this week as big name supermarkets and shops report on crucial Christmas trading.
Marks & Spencer (MKS.L), Debenhams (DEB.L), Morrisons (MRW.L), Ted Baker (TED.L), and Sainsbury’s (SBRY.L) will all deliver updates on their Christmas sales this week. All have significant short positions against them, meaning sophisticated investors such as hedge funds are betting their share prices will fall.
Marks & Spencer (MKS.L), which reports third quarter trading numbers on Thursday, is the second most shorted stock in the UK. 11.5% of M&S’ shares are out on loan to investors betting against the stock, according to ShortTracker.com.
UK hedge fund Marshall Wace has the biggest M&S short position. BlackRock, Pelham Capital, and US-based Lone Pine Capital also all have sizeable short positions.
Debenhams (DEB.L) is the fifth most shorted stock in Britain, with 10.3% of shares out on loan. The department store holds its annual general meeting on Thursday and will likely update on trading.
Odey Asset Management, one of Britain’s best-known hedge funds, has by far the biggest short position, accounting for 7.2% of shares out on loan. BlackRock, UBS, and Marshall Wace are also betting on a Debenhams share price decline.
Supermarket Morrisons is the 11th most shorted stock, with 7.8% of shares on loan. It updates on Christmas trading on Tuesday.
Sainsbury’s (SBRY.L) and Ted Baker (TED.L) have smaller short positions of 2.1% and 2% each. They report on Christmas trading on Wednesday and Thursday respectively.
Short selling explained
Short selling is a way of betting against a company by wagering that its share price will fall.
Shorts borrow shares in a company and then immediately sell them. They are hoping that the share will fall and they can buy the stock back for less than they sold them for when it comes time to return the loaned shares, thus making a profit.
Short selling is high-risk — if the share price rises, the investor can face potentially unlimited losses as they’re forced to buy back the shares at a higher price. As a result, only sophisticated investors such as hedge funds do it.
‘Big profits on paper’
British retail is one of the most shorted sectors in the UK and has also attracted the attention of US hedge funds. The Financial Times calculated that the bets against UK High Street chains and supermarkets run into the hundreds of millions.
The industry is facing multiple headwinds from Brexit, which could potentially threaten supply chains, online competition, unusual weather patterns disrupting sales cycles, and weak consumer confidence.
November saw the biggest fall in High Street shoppers in a decade and Sports Direct (SPD.L) founder said the month was the worst in his “living memory.” Online retailer Asos (ASC.L) then issued a big profit warning in mid-December. Finally, HMV fell into administration just before Christmas.
“The hedge funds should have had a great last two months, given the way that share prices tumbled against a backdrop of bad news from the High Street, so they should be sitting on big profits on paper,” Nick Bubb, an independent retail analyst, told Yahoo Finance UK.
However, he said investors betting against share price falls this week may be disappointed. Last week, department John Lewis reported strong Christmas sales and Next surprised the City with better than expected festive trading figures. Next (NXT.L) shares jumped on the news, likely hurting hedge funds such as Lone Pine Capital and Tiger Global who had shorted the company.
M&S and Debenhams are forecast by city analysts to report poor Christmas trading but Bubb said this may already be priced in to their share prices.
“The shorts will be disappointed that the struggling Debenhams and M&S haven’t had to come forward with early profit warnings, implying that Christmas trading was no worse than expected,” he said.
“I suspect that the shorts will have to suffer some short term pain over the next week, but there is probably no reason to panic, given the impact on consumer confidence of Brexit uncertainty over the next few months.”
Supermarkets less exposed
Analysts expect Sainsbury’s and Morrisons to both report slowing sales growth as consumers continue to turn towards discount supermarkets such as Aldi and Lidl.
Bruno Monteyne, an analyst with Bernstein who covers the supermarket sector, told Yahoo Finance UK he could see the case for shorting non-food retailers but “struggle with the rationale” for betting against supermarkets.
“Morrisons is the most expensive amongst food retailers, so more likely to get more shorts but [it] has a resilient business,” he said.
He added that Sainsbury’s was the most exposed to the pressures on non-food retailers through its acquisition of catalogue retailer Argos, but said scrutiny on that merger was likely limiting short positions. The UK’s Competition and Markets Authority is currently investigating the merger. If the outcome is positive, Sainsbury’s shares could jump and hurt shorts.
Tesco (TSCO.L) will also report on Christmas trading on Thursday. No short sellers are betting against Britain’s biggest supermarket.
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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.
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