According to official data from the Financial Conduct Authority (FCA), J Sainsbury (LSE: SBRY), WH Smith (LSE: SMWH) and Wm. Morrison Supermarkets (LSE: MRW)are the three most heavily shorted stocks on the London Stock Exchange.
That means that investors mainly hedge funds have borrowed and sold these companies shares in the hope that they will be able to buy them back more cheaply at a later date, generating a profit.
The numbers are quite surprising: 12% of Sainsburys shares have been shorted, along with 10% of WH Smiths and 8% of Morrisons. Theres clearly a large amount of smart City money behind these shorts, but does the bear case make sense?
On 20 November, I wrote that Sainsbury was making me nervous. Since then, the supermarkets share price has fallen by nearly 10%, suggesting I was right to be cautious.
In my view, the confident outlook of Sainsburys management is a concern: it was the last supermarket to acknowledge the scale of the changes facing the UK supermarket sector, it already has lower profit margins than its peers, and it recently admitted that 25% ofits stores are too large.
I think there could be more bad news to come from Sainsbury, but after falling 40% in 12 months, Im tempted to say that the shares are now close to the bottom.
In contrast to Sainsbury, WH Smiths share price is currently at an all-time high, putting the companys shares on a bullish forecast P/E of 15 times 2014/15 forecast earnings.
I can see the case for a short here: the firms share price already reflects a fair amount of future growth and its latest trading statement suggested that it is totally dependent on its travel outlets for growth, as like-for-like sales at high street stores fell by 4% during the last quarter.
Although Morrisons latest trading statement suggests that its turnaround plan is going well, the firm hasnt yet manage to reverse declining sales volumes and regain any of its lost market share.
Until this happens, the jury is still out and although Im personally quite optimistic about Morrisons, its worth pointing out that the sustainability of its dividend is still doubtful, and on a P/E of 13.5 times next years earnings, its valuation is already quite full.
For me, Morrisons is a hold.
Today’s top buying opportunity?
The Motley Fool’s top analysts are not currently recommending any of the three stocks I’ve mentioned in this article — but they are extremely bullish on a number of other big FTSE 100 dividend stocks.
I can’t reveal the team’s choices here, but you can find full details of these top income growth choices in “5 Shares To Retire On“.
To decide for yourself whether these potential retirement shares would fit into your portfolio, download your FREE, no-obligation copy of this report today.
To get started, just click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.