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Which UK stock is shorted more than any other? As of 4 January, that ignominious title currently goes to a well-loved seller of steak bakes, sausage, bean and cheese melts, and sausage rolls fit for vegans!
That’s right. Greggs (LSE: GRG) now has the most short interest out of all the very many shares listed on the London Stock Exchange. What’s going on here? And could all this doom and gloom be a great time to buy into the bakery chain?
Short selling
First, a little refresher on short interest. When an investor shorts a stock, they’re essentially borrowing it, then they sell it instantly only to buy it back (hopefully at a cheaper price) a while later before returning the stock and pocketing the difference.
The effect is that the investor can make money if the share price goes down – the opposite to buying a stock normally where an investor wants the share price to go up.
What’s a normal level of short interest? A rule of thumb is somewhere between 1% and 2%. But even that can be too high. The latest data I can find for Rolls-Royce, as an example, is only 0.7%.
When short interest starts to get concerning is with stocks like Domino’s Pizza (with 7% of short interest) or Ocado (also 7%). This is a sign of serious worries that the markets are incorrectly valuing the share price. Often this is down to a handful of large hedge funds that believe their analysis reveals something others aren’t seeing.
Here’s the kicker. The Greggs level of short interest is 11%. That’s a huge number – one in nine shares (of those listed) are being shorted. It’s a number that’s rapidly going up too. Greggs also has one of the largest increase in shorts (as a percentage) over the last month.
Why so gloomy?
As for why there’s so much short interest, it likely comes down to an ailing growth story and pressure on margins.
Greggs’ success has been built on expanding its locations throughout Britain – and this had been expected to continue. Even now, it plans to build over a thousand more stores in the coming years. But perhaps a saturation point has already been reached for the number of cheap food-to-go bakeries one country can hold.
Margins haven’t been helped by increases to wage and NI costs – the firm employs a whopping 34,000 people. The ongoing cost-of-living crisis hasn’t helped matters either. These problems have contributed to a 49% fall in the share price in the last year. The short sellers perhaps expect more to come.
That’s not to say it’s all bad. JPMorgan just started coverage of the stock in a positive fashion, giving it an Overweight rating. The share price jumped 5% on the news. And, with fourth-quarter earnings landing on 8 January, that could be the start of a turnaround.
That said, I see too much risk here to want to own the stock myself.
