This is the second time in as many months Cineworld Group (LSE: CINE) finds itself as one of the top three most shorted FTSE shares, according to end-of-month data from the FCA.
Short-sellers have been circling since Cineworld’s shares flopped by over 50% in February 2018, after it announced the acquisition of its US rival, Regal Entertainment. The US is a mature market and thought to be at risk from the proliferation of streaming services, and the big, expensive deal irked investors when smaller, yet growing markets could have been entered on the cheap.
The release of full-year 2018 results (which included the results of Regal Entertainment) plumped up the share price from March to May of 2019 but prices again declined after the company announced it was selling some US cinemas and leasing them back.
Investors probably saw this as an admission that a king’s ransom was paid for those Regal revenues, particularly as some of the cash was earmarked for reducing company debt, and were unimpressed with a special dividend being paid with the rest. Looking back at the full-year results their attention may have then been drawn to the contractions in both gross and operating margins, the 17 times increase in net financing expense, and the increase in the ratio of total liabilities to total equity from 0.58 to 1.53. Revenues have grown, but costs have increased and the balance sheet is weaker.
Since August, notifications of big institutional investors selling their holdings in Cineworld have been coming in droves. The share price has hit a new five-year low in the last few weeks, and the net short position against its shares stands at 12.02% going into December.
Not out of the woods yet
Making it’s third consecutive monthly top three most shorted shares appearance is Wood Group (LSE: WG), which is a provider of equipment and services to the oil, gas, and coal industry. Equipment and service providers to the oil & gas industry have had to slash prices to win contracts as producers seek to lower their costs in light of lower oil prices.
Annual profits for Wood Group have fallen from over $300m in 2014 to losses in 2017 and 2018. The company is now trying to cut its own costs – a profit was made for the first six months of 2019 – and reduce its reliance on the fossil fuel industry, despite the sale of its nuclear business (to deleverage the balance sheet) seemingly countering this message.
Dividends have been increasing despite dividend cover being negative in 2017 and 2018. Investors will be fearing a cut, which would hurt the share price, and expectations of a cut help explain why there is a net short position of 9.24% on the stock going into December.
Betting against the house
Gambling stocks in general took a hit in November when limits and restrictions for online gambling in the UK were suggested. Flutter Entertainment was not hit as hard as other gambling companies, perhaps because it gets relatively more revenue outside the UK and could point to strong growth in the US.
Flutter’s UK revenues are, however, still at risk, and the US is still loss-making, yet its share price has risen. Flutter is a new entry in the top three with a net short position of 9.06% going into December; short-sellers are betting its share price will fall.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK owns shares of Paddy Power Betfair. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019