Why Cineworld is the UK’s most shorted stock

Cineworld, the world’s second-largest cinema chain, has been revealed as the UK’s most shorted stock.

Some 9.51 per cent of Cineworld’s stock was held short by 10 investment firms, according to analysis carried out by ETF provider GraniteShares, with Adelphi Capital LLP having the largest short position with 2.07 per cent of the company’s shares. 

Cineworld has had a torrid year, having been forced to close its doors for the second time in six months while the UK endures a second coronavirus lockdown.

Over the past 12 months the company’s share price has fallen by a whopping 77 per cent, with the biggest drop taking place at the start of the first lockdown when it fell from £2.95 on 4 March to 45.3p by 17 March.

While it has recouped some of its losses, currently standing at 45.80p, it still remains far below its £2.27 per share high of last year.

Over the past 12 months Cineworld's share price has fallen by a whopping 77 per cent

Over the past 12 months Cineworld's share price has fallen by a whopping 77 per cent

Over the past 12 months Cineworld’s share price has fallen by a whopping 77 per cent

Shorting stocks is one of the ways big investment funds make money and involves borrowing shares from another investor, betting that a company’s share price will fall and pocketing the difference when it does.

Chelsea Financial Services explains using the following analogy: ‘The price of an apple is 30p. You think the price is going to fall, so you borrow five apples from your mum’s fruit bowl and sell them to a friend for 30p each. 

‘The price falls to 20p so you go and buy five apples to replace the missing ones in the fruit bowl. 

‘You’ve made 50p profit – of which you give 10p to your mum as a fee for borrowing the apples in the first place.’

While this turns a profit for those taking short positions who turn out to be right, large numbers of a company’s shares being subjected to shorting can spook the market and effectively cause the share price to fall as investors bail out. 

This happened to banking stocks in the aftermath of the financial crisis back in 2008, triggering the then Financial Services Authority to impose a temporary short-selling ban on financial stocks to prevent banks from collapsing. 

In March, the Financial Conduct Authority instated a ban on short-selling dozens of Italian and Spanish companies after markets crashed following the announcement of travel bans in the wake of the global coronavirus pandemic.  

Large numbers of a company's shares being subjected to shorting can spook the market and effectively cause the share price to fall as investors bail out

Large numbers of a company's shares being subjected to shorting can spook the market and effectively cause the share price to fall as investors bail out

Large numbers of a company’s shares being subjected to shorting can spook the market and effectively cause the share price to fall as investors bail out

Why is Cineworld vulnerable to shorting? 

Ben Yearsley, director of Shore Financial Planning, says any company with a strong consumer focus has been under massive pressure over the past nine months. 

‘Some businesses can go online, but Cineworld isn’t one of them – it’s a physical business and as such, has no business if we are in lockdown,’ he says. 

‘The flip side is that if there is a vaccine and life gets back to normal then they should see a sharp rebound.’ 

The company also has large fixed costs associated with their buildings and zero revenue while lockdown is in force. A report this week said it was mulling over the prospect of entering a company voluntary arrangement.

Ryan Lightfood-Brown of Chelsea Financial Services said: ‘They have other issues too. Debt levels are quite high having built them up to grow the business by buying up other companies.

‘Cineworld also agreed to a takeover of Cineplex in February only to pull out in June after the pandemic hit. They are now being sued over that move which gives further weight to the short thesis.’

Over the past 12 months Cineworld's share price has fallen by a whopping 77 per cent

Over the past 12 months Cineworld's share price has fallen by a whopping 77 per cent

Over the past 12 months Cineworld’s share price has fallen by a whopping 77 per cent

Covid-induced shorting 

Cineworld is not the only company to suffer from short-selling. GraniteShares’ analysis found Premier Oil, MetroBank and Sainsbury’s were also on fund manager short lists.

The percentage of shorted stock for these companies is 9.14 per cent, 7.46 per cent and 6.95 per cent respectively, though the number of funds behind the shorting vary between three and five.

Publishing company Pearson, and a long-term favourite holding of star manager Nick Train, is currently the sixth most shorted UK stock with 7.43 per cent of its stock held short, with seven funds responsible for this.

UK’s most shorted stocks 
Company  Percentage of stock
held short (%)
Number of funds 
shorting the stock 
Cineworld Group  9.51  10 
Premier Oil 9.14
Tullow Oil  8.87 
Petrofac  8.42 
Metro Bank  7.46 
Pearson  7.43 
Sainsbury  6.95 
Hammerson  6.85 
Rolls-Royce  5.86 
Petropavlovsk  5.53 
Source: GraniteShares 

Many of the shares in the list are being massively impacted by Covid-19,’ said Yearsley. 

‘Oil stocks have been hit because we have been travelling and consuming less, forcing the oil price down and therefore putting huge pressure on higher cost producers. 

‘Likewise Hammerson has struggled with its big commercial property portfolio. Metro Bank is likely to have been impacted by the coronavirus but also long-term lower interest rates and issues with poor management.’

Which fund managers are shorting UK stocks? 

GraniteShares found investment giant BlackRock had the highest number of short positions on UK listed companies with 23. 

This was followed by GLG Partners LP, AQR Capital Management LLC, Marshall Wace LLP and Citadel Europe LLP with 22, 13, 12 and 11 short positions respectively. 

Will Rhind, chief executive of GraniteShares, said: ‘Fuelled by a number of factors including the coronavirus crisis and the US election, we have seen some of the highest levels of market volatility for years. 

‘Many sophisticated investors and traders have used this to try and generate returns from large shifts in the price of individual stocks, including shorting.

‘There is no sign that the heightened levels of volatility that we have seen this year will dissipate any time soon. 

There are any number of potential catalysts for the next move up or down, whether it is an EU-UK trade deal, the smoothness of the US presidential transition, or potentially the impact of Tesla’s addition to the S&P 500 in December.’ 

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