One thing I like to keep an eye on when analysing stocks is the list of the most-shorted ones in the UK. To recap, shorting is the process of betting on a companys share price to fall. If a company is being heavily shorted by hedge funds and other sophisticated investors, you have to be careful, in my view, because it means there could be something wrong with it. Just look at Carillion last year. It was heavily shorted all year and ended up going into liquidation, meaning investors lost everything.
Today, Im looking at two UK retail stocks, including a FTSE 100-listed retail giant, that are currently high up on the most-shorted list and, therefore, Im avoiding.
Marks & Spencer
According to shorttracker.co.uk, Marks & Spencer (LSE: MKS) is the third most shorted stock in the UK right now (after Pets at Home Group and Kier Group), with an 11.7% short interest. This doesnt surprise me, to be honest. In a retail world thats been significantly disrupted by the likes of ASOS and Amazon over the last decade, Marks & Spencer appears to have been left behind, and its prospects going forward look concerning.
The main problem with M&S, in my view, is that its clothing offering is not focused enough. I actually popped into a store in London yesterday, and I left quite unimpressed. To my mind, Marks clothes dont offer value (they could improve their basics range for a start), they dont offer quality like they used to, and they dont offer the latest fashion. That leaves the group in dangerous territory whats the competitive advantage? If you look at the retailers that are successful in the current environment, youll see that they tend to be way more focused in their approach, with a specific offering, aimed at specific market, and a strong online presence.Marks has a long way to go to turn things around.
The group released half-year numbers last week, and sales for the period were down 3.1%. While CEO Steve Rowe told investors that the retailer has reorganised into a family of strong businesses, Im not convinced. And neither are the hedge funds, as short interest has increased over the last month. As such, Im avoiding MKS shares for now, despite its low P/E of 12, and yield of 6.1%.
Debenhams
Similarly, Debenhams (LSE: DEB) is another retail stock I wouldnt touch at the moment. Its currently the seventh most shorted stock in the UK, according to shorttracker.co.uk, with a 10.5% short interest.
One thing were seeing at the moment (and this applies to MKS too) is that, in general, the traditional department store retail model is no longer working. Weve had House of Fraser go bankrupt recently, and the same thing has happened in the US, with retail giant Sears going under too. Clearly, buying habits have changed in recent years as online shopping has become so much easier.
Debenhams reported preliminary results a few weeks back and the numbers werent good, with like-for-like sales falling 2.3% and underlying profit before tax plummeting 65.1%. Furthermore, debt was up, and the final dividend was cut, meaning the overall payout for the year was just 0.50p per share, down from 3.425p last year.
Overall, the outlook for Debenhams is grim, in my view. As such, Im avoiding the shares.
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