Shoppers walk past Debenhams store in Oxford Street, London on October 25, 2018.
© Tolga Akmen/FT

Struggling retailer Debenhams, Ultra Electronics and Metro Bank are the least-loved stocks in the UK, according to a ranking of heavily shorted shares, with Debenhams making the list for the third consecutive year amid a shakeout on Britain’s high streets.

According to wealth manager Canaccord Genuity, the three companies are the UK’s most shorted stocks, meaning investors bet against them and benefit when their share prices slide.

Short sellers borrow shares from large institutions such as pension funds or insurance companies and sell them again in the hope the share price will fall. If that happens, the short seller repurchases the stock and profits from the difference in price.

Debenhams has been dogged by short sellers over the past two years, suffering a string of profit warnings in the past 12 months before securing a £40m lifeline in February to buy it time to restructure and avoid collapse.

It was second on Canaccord’s list of shorted companies in the UK in its May 2018 ranking and fell to the number three position in March 2019.

The company has been hit by declining footfall on the UK’s struggling high streets and a move to online shopping. It swung to a record loss last year and is expected to close 50 stores under the terms of its new rescue package.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Debenhams is on the ropes at the moment, and continued tough trading conditions on the UK high street have delivered yet another blow to the ailing retailer.

“Debenhams’ future is hanging in the balance, and with short sellers circling too, we can expect share price movements to be volatile. The department store needs to stage a Lazarus-like recovery to turn things around from here.”

The UK’s most shorted stocks
Company % held short
Ultra Electronics  11.5
Metro Bank  11.3
Debenhams 10.4
Anglo American  9.7
Marks and Spencer 9.6
Pearson  9.4
AA  9.2
Pets at Home 7.8
Jupiter Fund Management  7.8
Greencore Group  7.1
Source: Canaccord Genuity, Bloomberg

According to Canaccord, which used data from Bloomberg, 10.4 per cent of the company’s stock is on loan.

But it is not the most shorted stock. Investors are currently most pessimistic about Ultra Electronics, the UK defence company. Some 11.5 per cent of the company’s stock is currently on loan following profit warnings in 2017 and 2018 and declining revenue.

The company unveiled its first set of annual results under new chief executive Simon Pryce on Wednesday and said performance was “encouraging” despite a number of “legacy issues”, however.

Metro Bank is also being punished by investors. The company came under fire in January for an accounting error, following the revelation it had misclassified large numbers of commercial loans when calculating risk-weighted assets, and did not hold as much capital against them as it should have done.

Shares in Metro fell almost 40 per cent when the accounting error was first revealed alongside a profit warning, the worst one-day drop in a UK bank stock since the financial crisis. Since the end of last year it has been one of the worst-performing shorted stocks, according to online investment company AJ Bell.

Short selling is controversial. According to Simon McGarry, senior equity research analyst at Canaccord, it is often criticised by those “who feel [companies] are being picked on unfairly from speculators hoping to benefit from declines in their share price”.

Proponents argue that short selling creates more liquidity in financial markets and allows investors to express both positive and negative opinions on a stock.

It is a risky activity and short sellers often get it wrong. This year, investors betting against UK stocks lost out as the companies most heavily shorted by hedge fund groups, including AA, Asos and Just Eat, performed strongly between December and the middle of February.

Between the latest stock market low on December 27 and Valentine’s Day, just six of the 30 most-shorted UK shares have fallen in value, while stocks like AA experienced a 43 per cent share price rise, according to AJ Bell.

“Making money by going short is not as easy as it seems,” said Russ Mould, investment director of AJ Bell.

But UK short sellers are faring better than their US peers. According to Mr Mould, the S&P 500 has rallied much more strongly than the FTSE All-Share since its December 24 low and short-sellers have been “hammered”.

By mid-February, the 30 most-shorted stocks were up by more than a third on average since the pre-Christmas low, more than twice the gain in the benchmark index.

Shorting is mainly pursued by hedge funds and other professional investors, rather than retail investors, though some brokers do allow individuals to bet on a company’s falling share price.

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